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

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 faces the choice between employing an in-house management and contracting with an independent management; the cost-saving incentives facing the management are weaker in the former case. Cost-saving incentives trickle-down to the agent, affecting the cost-saving/quality tradeoff. It is shown that: weak cost-saving incentives to the management promotes quality if it is hard enough to meaurse; a more severe quality-control problem between the principal and the management, as well as a higher valuation of quality, makes an in-house management more attractive.

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File URL: http://project.nek.lu.se/publications/workpap/Papers/WP04_13.pdf
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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2004:13.

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Length: 31 pages
Date of creation: 24 Mar 2004
Date of revision:
Handle: RePEc:hhs:lunewp:2004_013
Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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