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A Trickle-Down Theory of Incentives with Applications to Privatization and Outsourcing

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Author Info
Andersson, Fredrik () (Department of Economics, Lund University)

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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 faces the choice between employing an in-house management and contracting with an independent management; the cost-saving incentives facing the management are weaker in the former case. Cost-saving incentives trickle-down to the agent, affecting the cost-saving/quality tradeoff. It is shown that: weak cost-saving incentives to the management promotes quality if it is hard enough to meaurse; a more severe quality-control problem between the principal and the management, as well as a higher valuation of quality, makes an in-house management more attractive.

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Publisher Info
Paper provided by Lund University, Department of Economics in its series Working Papers with number 2004:13.

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Length: 31 pages
Date of creation: 24 Mar 2004
Date of revision:
Handle: RePEc:hhs:lunewp:2004_013

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/
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Related research
Keywords: make-or-buy decision; multitask principal-agent problem; contracting out;

Other versions of this item:

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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