Working Paper Series
Make-or-buy Decisions and the Manipulability of Performance Measures
Abstract: The make-or-buy decision is analyzed in a simple framework
combining contractual incompleteness with the existence of imperfect but
contractible performance measures. Contractual incompleteness gives rise to
two regimes, identified with make and buy. The performance measure on which
comprehensive contracts can be written is imperfect in the sense of being
subject to manipulation. The main result is that the impact – or
"externality" – of manipulation on true performance is key; a positive
(negative) such externality favors make (buy).
Keywords: Make-or-buy decision; Manipulation; Outsourcing; (follow links to similar papers)
JEL-Codes: D23; L22; L24; (follow links to similar papers)
38 pages, December 3, 2009
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