Insourcing vs outsourcing in vertical structure

Arbeitspapier

We study an agency model with vertical hierarchy - the principal, the prime-agent and the sub-agent. The principal faces a project that needs both agents' services. Due to costly communication, the principal receives a report only from the prime-agent, who receives a report from the sub-agent. The principal can directly incentivize each agent by setting individual transfers (insourcing), or sets only one overall transfer to an independent organization in which the prime-agent hires the sub-agent (outsourcing). We show that insourcing is always optimal when the principal can perfectly process the prime-agent's report. When the principal's information process is limited, however, outsourcing can be the prevailing mode of operation. In addition, insourcing under limited information process is prone to collusion between the agents, whereas no possibility of collusion arises with outsourcing.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 495

Classification and Topics

• Classification: Wirtschaft ; Economics of Contract: Theory ; Organization of Production ; Firm Performance: Size, Diversification, and Scope
• Subject: information process ; sourcing policy ; vertical structure

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Shin, Dongsoo ; Strausz, Roland
• Event: Veröffentlichung
• (who): Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition
• (where): München und Berlin
• (when): 2024

Further information

• Last update: 10.03.2025, 11:44 AM CET