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Make-or-Buy Decisions and the Manipulability of Performance Measures

Author

Summary, in English

The make-or-buy decision is analyzed in a simple framework combining contractual incompleteness with the existence of an imperfect but contractible performance measure. Contractual incompleteness gives rise to two regimes, identified with make and buy. The performance measure on which comprehensive contracts can be written is imperfect in the sense of being subject to manipulation. The performance incentives faced by the agent are stronger in the “buy” regime. A positive (negative) impact – or ”externality” – of manipulation on true performance favors make (buy).

Publishing year

2011

Language

English

Publication/Series

Journal of Theoretical Economics

Volume

11

Issue

1

Document type

Journal article

Publisher

Berkeley Electronic Press

Topic

  • Economics

Keywords

  • make-or-buy decision
  • manipulation
  • outsourcing

Status

Published

ISBN/ISSN/Other

  • ISSN: 1935-1704