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On the Optimality of Outsourcing when Vertical Integration can Mitigate Information Asymmetries

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  • Schmitz, Patrick W.

Abstract

Consider a buyer and a seller who have agreed to trade an intermediate good. It is ex-post efficient to adapt the good to the prevailing state of the world. The seller has private information about the costs of adapting the good. In the case of non-integration, the buyer has no possibility to verify claims that the seller makes about her costs. In the case of vertical integration, the buyer can verify evidence about the costs that the seller might be able to provide. Even though we assume no further differences between the ownership structures, it turns out that the parties may prefer non-integration.

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  • Schmitz, Patrick W., 2021. "On the Optimality of Outsourcing when Vertical Integration can Mitigate Information Asymmetries," CEPR Discussion Papers 15970, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15970
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    More about this item

    Keywords

    Incomplete contracts; Make-or-buy decision; Property rights approach; Private information; Outsourcing;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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