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Make-or-buy decisions and the manipulability of performance measures

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  • Andersson, Fredrik

    ()
    (Department of Economics, Lund University)

Abstract

The make-or-buy decision is analyzed in a simple framework combining contractual incompleteness with the existence of imperfect but contractible performance measures. Contractual incompleteness gives rise to two regimes, identified with make and buy. The performance measure on which comprehensive contracts can be written is imperfect in the sense of being subject to manipulation. The main result is that the impact – or "externality" – of manipulation on true performance is key; a positive (negative) such externality favors make (buy).

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File URL: http://project.nek.lu.se/publications/workpap/Papers/WP09_16.pdf
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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2009:16.

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Length: 38 pages
Date of creation: 04 Nov 2009
Date of revision: 20 Nov 2009
Handle: RePEc:hhs:lunewp:2009_016

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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/en
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Keywords: make-or-buy decision; manipulation; outsourcing;

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  8. Oliver Hart & John Moore, 2007. "Contracts as Reference Points," ESE Discussion Papers 170, Edinburgh School of Economics, University of Edinburgh.
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Cited by:
  1. Andersson, Fredrik, 2010. "On the Cost-vs-Quality Tradeoff in Make-or-Buy Decisions," Working Papers 2010:2, Lund University, Department of Economics.
  2. Andersson, Fredrik & Jordahl, Henrik, 2011. "Outsourcing Public Services: Ownership, Competition, Quality and Contracting," Working Paper Series 874, Research Institute of Industrial Economics.

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