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Portrait of Fredrik Andersson. Photo.

Fredrik Andersson

Head of the Department of Economics, Professor

Portrait of Fredrik Andersson. Photo.

The cost-vs.-quality trade-off in make-or-buy decisions

Author

  • Fredrik Andersson

Summary, in English

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.

Department/s

  • Department of Economics

Publishing year

2023-10-19

Language

English

Document type

Conference paper

Topic

  • Economics

Conference name

44th Meeting of the Association of Southern European Economic Theorists

Conference date

2023-10-19 - 2023-10-21

Conference place

Lisbon, Portugal

Status

Published