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

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  • Andersson, Fredrik

    () (Research Institute of Industrial Economics (IFN))

Abstract

The make-or-buy decision is analyzed in a simple framework combining contractual incompleteness with the existence of imperfect but contractible performance measures. 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 main result is that the impact – or "externality" – of manipulation on true performance is key; a positive (negative) such externality favors make (buy).

Suggested Citation

  • Andersson, Fredrik, 2009. "Make-or-buy Decisions and the Manipulability of Performance Measures," Working Paper Series 815, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:0815
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Andersson, Fredrik, 2010. "On the Cost-vs-Quality Tradeoff in Make-or-Buy Decisions," Working Papers 2010:2, Lund University, Department of Economics.
    2. Andersson, Fredrik & Jordahl, Henrik, 2011. "Outsourcing Public Services: Ownership, Competition, Quality and Contracting," Working Paper Series 874, Research Institute of Industrial Economics.

    More about this item

    Keywords

    Make-or-buy decision; Manipulation; Outsourcing;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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