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Adaptive Contracting: The Trial-and-Error Approach to Outsourcing

Author

Listed:
  • Morten Bennedsen

    (Copenhagen Business School)

  • Christian Schultz

    (Institute of Economics, University of Copenhagen)

Abstract

Adaptive contracting is defined as a strategy in which a principal experiments - through trial-and-error - with the degree of contractual completeness. We highlight two potential benefits of an adaptive approach: First, the implied delegation of authority can be beneficial for the principal even if the agent acts opportunistically. Second, the government extracts information from experimenting with delegation of authority and we identify a positive option value associated with this learning feature.

Suggested Citation

  • Morten Bennedsen & Christian Schultz, 2003. "Adaptive Contracting: The Trial-and-Error Approach to Outsourcing," Discussion Papers 03-18, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:0318
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/2003/0318.pdf/
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    Cited by:

    1. Debabrata Dey & Ming Fan & Conglei Zhang, 2010. "Design and Analysis of Contracts for Software Outsourcing," Information Systems Research, INFORMS, vol. 21(1), pages 93-114, March.

    More about this item

    Keywords

    incomplete contracting; trial and error; authority; outsourcing;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General

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