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Adaptive Contracting: The Trial-and-Error Approach to Outsourcing

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Author Info

  • Morten Bennedsen

    (Copenhagen Business School)

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

Abstract

Adaptive contracting is defined as a strategy in which a principal experiments - through trial-and-error - with the degree of contractual completeness. We highlight two potential benefits of an adaptive approach: First, the implied delegation of authority can be beneficial for the principal even if the agent acts opportunistically. Second, the government extracts information from experimenting with delegation of authority and we identify a positive option value associated with this learning feature.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/2003/0318.pdf/
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 03-18.

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Length: 27 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:kud:kuiedp:0318

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Keywords: incomplete contracting; trial and error; authority; outsourcing;

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