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Make-or-Buy Decisions and the Manipulability of Performance Measures

  • Andersson Fredrik

    ()

    (Lund University and the Research Institute of Industrial Economics)

The make-or-buy decision is analyzed in a simple framework combining contractual incompleteness with the existence of an imperfect but contractible performance measure. 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 performance incentives faced by the agent are stronger in the "buy" regime. A positive (negative) impact -- or "externality" -- of manipulation on true performance favors make (buy).

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Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 11 (2011)
Issue (Month): 1 (December)
Pages: 1-30

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Handle: RePEc:bpj:bejtec:v:11:y:2011:i:1:n:23
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