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Outsourcing as a cooperative game between the CEO and labor: theory and evidence

Author

Listed:
  • Jongmoo Jay Choi

    (Temple University)

  • Ming Ju

    (Louisiana Tech University)

  • Jose M. Plehn-Dujowich

    (BrightQuery, Inc.)

  • Xiaotian Tina Zhang

    (Saint Mary’s College of California)

Abstract

We develop a model of a cooperative power game between a chief executive officer (CEO) and labor over a proposed corporate outsourcing, and test the model’s predictions concerning the decision to outsource, division of profits, and post-outsourcing firm performance using a sample of outsourcing deals by US firms. In accord with the model, we find that a firm is more likely to outsource when CEO power is greater, production costs are higher, and the industry is more homogeneous. Notably, we find that the outsourcing decision does not affect the CEO’s share of profits, and that CEO power is positively related to post-outsourcing performance. Additionally, poor prior firm performance moderates the power dynamics between the CEO and labor. These findings imply that labor can supplement traditional governance mechanisms and act as an effective managerial monitor when the firm undergoes a major restructuring.

Suggested Citation

  • Jongmoo Jay Choi & Ming Ju & Jose M. Plehn-Dujowich & Xiaotian Tina Zhang, 2022. "Outsourcing as a cooperative game between the CEO and labor: theory and evidence," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 1095-1131, October.
    • Handle: RePEc:kap:rqfnac:v:59:y:2022:i:3:d:10.1007_s11156-022-01071-x
    DOI: 10.1007/s11156-022-01071-x
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    More about this item

    Keywords

    Power play; CEO power; Labor bargaining; Outsourcing; Stakeholder model; Game theory;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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