IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Estimating Strategic Complementarities in Credit Union’s Outsourcing Decisions

Listed author(s):
  • Andrew Cohen
  • Ron Borzekowski

We examine the choice between internal or external provision of information technology (“IT†) services for US credit unions. Credit unions may provide their own systems for tracking loans and deposit accounts or they may choose to outsource these systems from external providers. Empirically, the likelihood that a credit union outsources its system is increasing in the number of other credit unions in the same geographic market who outsource. This empirical regularity may be due to common characteristics of credit unions in close proximity that make them more or less likely to outsource. It may also be due to complementarities whereby one credit union’s decision to outsource affects the relative costs associated with outsourcing for the other credit unions in the market. Anecdotal evidence suggests that the credit unions communicate with one another at the local level due to their non-profit status and lack of significant competitive overlap. This level of communication may give rise to strategic complementarities present in models of social interactions as well as network effects. In this study, we estimate a structural model in which credit unions outsource if doing so achieves a cost savings relative to maintaining their own systems. The decision to outsource is modeled as a game in which the simultaneous outsourcing decisions of the other credit unions in the market are contained as an argument in the relative costs associated with outsourcing. Ours is an example of a game with strategic complementarities in the sense that a given agent’s payoff is increasing in the number of other players who take the same action. The problems arising from multiple equilibria which are endemic to these games have received significantly less attention, in large part because interest in the economics of social interactions and network externalities (two leading examples involving complementarities among agents’ actions) has been a relatively recent phenomenon. To estimate the extent of complementarities in credit union outsourcing decisions, we adapt the intuition in recent work by Ciliberto and Tamer (2004) and propose a method for estimating payoff parameters that places no restrictions on which outcome obtains when the model is consistent with multiple equilibria. Unlike previous work, however, we are able to overcome the curse of dimensionality that makes estimation of the model impossible for markets with more than five or so firms. We present an algorithm to find the fixed points of the best reply correspondence using known properties of the set of pure strategy Nash equilibria. Our model is also powerful enough to assess coordination failures in different sized markets. Our main empirical finding is that the probability that the observed outcome is pareto dominated by another outcome, when the observed outcome is consistent with multiple PSNE, is U-shaped reaching its minimum at five credit unions.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 410.

in new window

Date of creation: 11 Nov 2005
Handle: RePEc:sce:scecf5:410
Contact details of provider: Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:410. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.