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

Listed author(s):
  • Andersson, Fredrik

    ()

    (Research Institute of Industrial Economics (IFN))

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).

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 815.

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Length: 38 pages
Date of creation: 03 Dec 2009
Handle: RePEc:hhs:iuiwop:0815
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Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

Phone: +46 8 665 4500
Fax: +46 8 665 4599
Web page: http://www.ifn.se/
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