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Efficient organization of production: nested versus horizontal outsourcing

Author

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  • Oz Shy
  • Rune Stenbacka

Abstract

The authors characterize equilibrium and efficient modes of production by comparing nested (vertical) outsourcing with horizontal outsourcing. Nested outsourcing is found to be inefficient unless the cost of monitoring outsourced production lines increases sharply with the number of subcontractors and not only with the number of outsourced components. They characterize a market failure in which nested outsourcing is selected when the case dictates that horizontal outsourcing is the efficient outsourcing mode. This failure occurs at an intermediate range of the costs of monitoring outsourcing to several subcontractors.

Suggested Citation

  • Oz Shy & Rune Stenbacka, 2009. "Efficient organization of production: nested versus horizontal outsourcing," Working Papers 09-9, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:09-9
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    Cited by:

    1. Manel Antelo & Lluís Bru, 2018. "Option Contracts in a Vertical Industry," Manchester School, University of Manchester, vol. 86(4), pages 533-557, July.
    2. Shy, Oz & Stenbacka, Rune, 2012. "Efficient organization of production: Nested versus horizontal outsourcing," Economics Letters, Elsevier, vol. 116(3), pages 593-596.
    3. Rosar, Frank, 2017. "Strategic outsourcing and optimal procurement," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 91-130.

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    Keywords

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    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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