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Agent takeover risk of principal in outsourcing relationships

Author

Listed:
  • Alnoor Bhimani
  • Kjell Hausken
  • Mthuli Ncube

Abstract

The provision of outsourcing services creates relationships between knowledge vested with the supplier and the viability of outsourcing arrangements. Knowledge accumulation by the outsourcee can reach a level where it poses a market entry or takeover risk to the outsourcer. Knowledge translates into cash flows interpreted as asset values modelled as geometric Brownian motion accounting for uncertainty, drift, and volatility. We present this argument within a principal-agent theoretical perspective which embeds a real options analysis to represent risk growth. As an alternative to a complicated analysis of the benefits and costs to the agent and principal of a takeover, we propose that takeover of the principal by the agent can be expected if the agent's discounted cash flows is larger than the principal's discounted cash flows. The probability of the takeover of the principal's market by the agent is expressed as an 'optimal stopping time' probability problem.

Suggested Citation

  • Alnoor Bhimani & Kjell Hausken & Mthuli Ncube, 2010. "Agent takeover risk of principal in outsourcing relationships," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 12(4), pages 329-340.
    • Handle: RePEc:ids:gbusec:v:12:y:2010:i:4:p:329-340
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    References listed on IDEAS

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    Cited by:

    1. Xing Gao & Weijun Zhong & Shue Mei, 2013. "Information Security Investment When Hackers Disseminate Knowledge," Decision Analysis, INFORMS, vol. 10(4), pages 352-368, December.
    2. Kjell Hausken, 2019. "Principal–Agent Theory, Game Theory, and the Precautionary Principle," Decision Analysis, INFORMS, vol. 16(2), pages 105-127, June.
    3. Silke Friedrich, 2013. "Policy persistence and rent extraction," Public Choice, Springer, vol. 157(1), pages 287-304, October.
    4. Silke Friedrich, 2013. "Policy Persistence and Rent Extraction," CESifo Working Paper Series 4325, CESifo.
    5. Rajorshi Sen Gupta, 2018. "Risk Management and Intellectual Property Protection in Outsourcing," Global Business Review, International Management Institute, vol. 19(2), pages 393-406, April.

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    More about this item

    Keywords

    principal-agent theory; outsourcing; hostile takeovers; learning; discounted cash flow; revenue; volatility; Brownian motion; Wiener process; market entry risk; takeover risk; real options.;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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