The cost-vs.-quality trade-off in make-or-buy decisions
Andersson, Fredrik LU
(2023)
44th Meeting of the Association of Southern European Economic Theorists
- Abstract
- The make-or-buy decision is analyzed in a simple two-task principal-agent model. There is a cost-saving-vs.-quality trade-off in effort provision, both effort and outcome having these two dimensions. The principal faces a dichotomous choice between make/in-house, coming with weak cost-saving incentives for the agent, and buy/outsourcing, coming with strong incentives; the dichotomy is due to an incomplete-contracting limitation necessitating that one party be residual claimant of cost-savings. Choosing buy rather than make leads to
higher cost-saving effort and in a plausible main case to lower effort directed towards quality and lower equilibrium quality, this in spite of stronger direct quality-provision incentives. The... (More) - The make-or-buy decision is analyzed in a simple two-task principal-agent model. There is a cost-saving-vs.-quality trade-off in effort provision, both effort and outcome having these two dimensions. The principal faces a dichotomous choice between make/in-house, coming with weak cost-saving incentives for the agent, and buy/outsourcing, coming with strong incentives; the dichotomy is due to an incomplete-contracting limitation necessitating that one party be residual claimant of cost-savings. Choosing buy rather than make leads to
higher cost-saving effort and in a plausible main case to lower effort directed towards quality and lower equilibrium quality, this in spite of stronger direct quality-provision incentives. The attractiveness of make-vs.-buy is explored and shown to be aligned with its impact on quality. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/11b34f60-29c0-4e4b-8453-8afb42864674
- author
- Andersson, Fredrik
LU
- organization
- publishing date
- 2023-10-19
- type
- Contribution to conference
- publication status
- published
- subject
- conference name
- 44th Meeting of the Association of Southern European Economic Theorists
- conference location
- Lisbon, Portugal
- conference dates
- 2023-10-19 - 2023-10-21
- language
- English
- LU publication?
- yes
- id
- 11b34f60-29c0-4e4b-8453-8afb42864674
- date added to LUP
- 2024-10-10 10:45:57
- date last changed
- 2025-04-04 14:13:49
@misc{11b34f60-29c0-4e4b-8453-8afb42864674,
abstract = {{The make-or-buy decision is analyzed in a simple two-task principal-agent model. There is a cost-saving-vs.-quality trade-off in effort provision, both effort and outcome having these two dimensions. The principal faces a dichotomous choice between make/in-house, coming with weak cost-saving incentives for the agent, and buy/outsourcing, coming with strong incentives; the dichotomy is due to an incomplete-contracting limitation necessitating that one party be residual claimant of cost-savings. Choosing buy rather than make leads to<br/>higher cost-saving effort and in a plausible main case to lower effort directed towards quality and lower equilibrium quality, this in spite of stronger direct quality-provision incentives. The attractiveness of make-vs.-buy is explored and shown to be aligned with its impact on quality.}},
author = {{Andersson, Fredrik}},
language = {{eng}},
month = {{10}},
title = {{The cost-vs.-quality trade-off in make-or-buy decisions}},
url = {{https://lup.lub.lu.se/search/files/197010197/Multitask_ASSET_230615.pdf}},
year = {{2023}},
}