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Experience Benefits and Firm Organization

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  • Ching-to Albert MA

    ()
    (Department of Economics, Boston University.)

  • Ingela Alger

    ()
    (TSE (LERNA, CNRS) and Economics Department, Carleton University)

  • Regis Renault

    ()
    (Universite de Cergy-Pontoise, THEMA, Cergy-Pontoise Cedex FRANCE, and Institut Universitaire de France;)

Abstract

A principal chooses between in-house production and outsourcing. An agent will be hired when production is in-house. An agent will be contracted upon when production is outsourced. In each case, the agent earns experience benefits: future monetary returns from managing production, reputation, and enjoyment. The principal would like to extract experience bene ts. He can do so when production is outsourced. But the external agent earns information rent from private information about production costs. The principal cannot fully extract experience bene ts when production is in-house because the internal agent must receive a minimum income, although the principal has full information on production costs. Our theory proposes a new trade-off, between information rent under outsourcing, and experience rent under in-house production. The principal chooses outsourcing when experience benefits are high. The principal's organizational choice may be socially inefficient.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2012-007.

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Length: 41 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:bos:wpaper:wp2012-007

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Keywords: vertical integration; experience bene ts; experience rents; informational rents.;

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  1. Christoph Luelfesmann, 2000. "The Theory of Human Capital Revisited: On the Interaction of General and Specific Investments," Econometric Society World Congress 2000 Contributed Papers 0659, Econometric Society.
  2. 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.
  3. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  4. Rosen, Sherwin, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 366-82, August.
  5. Ingela Alger & Régis Renault, 2007. "Screening Ethics when Honest Agents Keep their Word," Economic Theory, Springer, vol. 30(2), pages 291-311, February.
  6. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9.
  7. Masten, Scott E, 1988. "A Legal Basis for the Firm," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 181-98, Spring.
  8. Manuel González & Benito Arruñada & Alberto Fernández, 1999. "Causes of subcontracting: Evidence from panel data on construction firms," Economics Working Papers 428, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Jacques Crémer & Luis Garicano & Andrea Prat, 2007. "Language and the Theory of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 122(1), pages 373-407, 02.
  10. Masten, Scott E. & Meehan, James Jr. & Snyder, Edward A., 1989. "Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 265-273, October.
  11. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  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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