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Experience Benefits and Firm Organization

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Author Info

  • Alger Ingela

    ()
    (Toulouse School of Economics and Carleton University)

  • Ma Ching-to Albert

    ()
    (Boston University)

  • Renault Regis

    ()
    (Universite de Cergy-Pontoise)

Abstract

A principal needs a worker for the production of a good. The worker can be hired as an internal agent, or an external agent under a contract. These two organizational modes correspond to in-house production and outsourcing, respectively. In each case, the agent earns experience benefits: future monetary returns from managing production, reputation, and enjoyment. The principal would like to extract experience benefits, and can do so when production is outsourced. However, the external agent earns information rent from private information about production costs. The principal cannot fully extract experience benefits when production is in-house because the internal agent must be provided with a minimum income, although the principal has full information on production costs. Our theory proposes a new trade-off, one between information rent under outsourcing and experience rent under in-house production. The principal chooses outsourcing when experience benefits are high, but her organizational choice may be socially inefficient.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 12 (2012)
Issue (Month): 1 (September)
Pages: 1-35

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Handle: RePEc:bpj:bejeap:v:12:y:2012:i:1:n:39

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  1. Joan R. Roses, 2005. "Subcontracting and Vertical Integration in the Spanish Cotton Industry," Working Papers in Economic History wh051302, Universidad Carlos III, Departamento de Historia Económica e Instituciones.
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  12. Hubbard, Thomas N, 2001. "Contractual Form and Market Thickness in Trucking," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 369-86, Summer.
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