Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 784: A Trickle-Down Theory of Incentives with Applications to Privatization and Outsourcing

Fredrik Andersson ()
Additional contact information
Fredrik Andersson: Department of Economics, Postal: Lund University, P.O. Box 7082, S-220 07, Lund, Sweden

Abstract: The make-or-buy decision is analyzed in a three-layer principal-management-agent model. There is a cost-saving/quality tradeoff in effort provision. The principal chooses between employing an in-house management and contracting with an independent management; the cost-saving incentives facing the management are, endogenously, weaker in the former case. Cost-saving incentives trickle down to the agent, affecting the cost-saving/quality trade-off. It is shown that weak cost-saving incentives to the management promote quality provision by the agent, and that a more severe quality-control problem between the principal and the management, as well as a higher valuation of quality, make an in-house management more attractive.

Keywords: Make-or-buy decision; Multitask principal-agent problem; Outsourcing

JEL-codes: D23; L22; L24

28 pages, January 7, 2009

Full text files

wp784.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Elisabeth Gustafsson ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2018-01-23 23:34:36.