CEF.UP – ECO Seminar/Webinar

Friday – November 17^th, 2023, at 1:00 p.m. | Room 305| Online

“The cost-vs.-quality tradeoff in make-or-buy decisions”

Frederik Andersson  –  Lund University

Abstract:

“The make-or-buy decision is analyzed in a simple two-task principal-agent model. There is a cost-saving-vs.-quality trade-off in effort provision, both effort and outcome having these two dimensions. The principal faces a dichotomous choice between make/in-house, coming with weak cost-saving incentives for the agent, and buy/outsourcing, coming with strong incentives; the dichotomy is due to an incomplete-contracting limitation necessitating that one party be residual claimant of cost-savings. Choosing buy rather than make leads to higher cost-saving effort and in a plausible main case to lower effort directed towards quality and lower equilibrium quality, this in spite of stronger direct quality-provision incentives. The attractiveness of make-vs.-buy is explored and shown to be aligned with its impact on quality.”