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A Trickle-Down Theory of Incentives with Applications to Privatization and Outsourcing

  • Andersson, Fredrik

    ()

    (Department of Economics)

The make-or-buy decision is analyzed in a three-layer principal-management-agent model. There is a cost-saving/quality tradeoff in effort provision. The principal chooses between employing an in-house management and contracting with an independent management; the cost-saving incentives facing the management are, endogenously, weaker in the former case. Cost-saving incentives trickle down to the agent, affecting the cost-saving/quality trade-off. It is shown that weak cost-saving incentives to the management promote quality provision by the agent, and that a more severe quality-control problem between the principal and the management, as well as a higher valuation of quality, make an in-house management more attractive.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 784.

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Length: 28 pages
Date of creation: 07 Jan 2009
Date of revision:
Handle: RePEc:hhs:iuiwop:0784
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