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Integration or Outsourcing: Combining Ex Ante Distortions and Ex Post Inefficiencies

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  • Nowak, Verena

Abstract

Final good production often requires a firm's headquarter services and a foreign supplier's manufacturing input. With incomplete contracts, firms that decide whether to choose integration or outsourcing of this supplier do not only have to consider the ex ante investment incentives that influence the own and the supplier's underinvestment problem. Instead, firms also have to take into account the risk that the supplier cribs the knowledge and ex post becomes a competitor for the final good. With exogeneous risk of ex post inefficiencies associated with one particular organizational form, this organizational form becomes less likely. However, considering the supplier's incentives to become a competitor, integrated supplier have a higher risk of ex post inefficiencies. Hence, the consideration of ex post inefficiencies makes outsourcing more likely.

Suggested Citation

  • Nowak, Verena, 2016. "Integration or Outsourcing: Combining Ex Ante Distortions and Ex Post Inefficiencies," Annual Conference 2016 (Augsburg): Demographic Change 145897, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145897
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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