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On the Economics of Subcontracting


  • Achim Wambach

    () (University of Cologne)

  • Gero von Grawert-May

    () (TWS-Partners, Munich)


In a situation where firms compete for a contract of an agency and subcontract part of this contract it is shown that: (i) If the timing of subcontracting is determined by the firms,then the more efficient firms subcontract after the award, while the less efficient firms subcontract before the award. (ii) Depending on the market structure, using a Dutch auction can be preferable to an English auction when subcontracting takes place before the award. (iii) To foster competition among subcontractors, a firm should not always subcontract even if subcontractors are cheaper than producing in-house. (iv) The agency when deciding on the timing of subcontracting faces a trade-off between a competition enhancing effect and an efficiency effect.

Suggested Citation

  • Achim Wambach & Gero von Grawert-May, 2006. "On the Economics of Subcontracting," Rivista di Politica Economica, SIPI Spa, vol. 96(1), pages 117-134, January-F.
  • Handle: RePEc:rpo:ripoec:v:96:y:2006:i:1:p:117-134

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    References listed on IDEAS

    1. Paul Klemperer, 2004. "Auctions: Theory and Practice," Online economics textbooks, SUNY-Oswego, Department of Economics, number auction1.
    2. R. Preston McAfee & John McMillan, 1986. "Bidding for Contracts: A Principal-Agent Analysis," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 326-338, Autumn.
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures


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