CEF.UP - ECO Seminar | Webinar - The cost-vs.-quality tradeoff in make-or-buy decisions.
Friday, November 17th 2023 | 1:00 pm | room 305 | online
The cost-vs.-quality tradeoff in make-or-buy decisions.
Frederik Andersson – Lund University
“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”
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“Cef.up is financed by Portuguese public funds through FCT - Fundação para a Ciência e Tecnologia, I.P., in the framework of the project with reference UIDB/04105/2020”