Credibility and Monitoring: Outsourcing as a Commitment Device

29 Pages Posted: 9 Apr 2009 Last revised: 17 Jun 2009

See all articles by Benjamin Bental

Benjamin Bental

University of Haifa - Department of Economics

Bruno Deffains

Université Paris II - Panthéon-Assas; Institut Universitaire de France

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Date Written: December 18, 2008

Abstract

We analyze an environment plagued by double moral hazard where the worker's effort level and the employer's monitoring level are not contractible. In such an environment, the employer tends to over-monitor thereby inducing low effort. To ease the latter problem, the employer may choose to outsource the activity specifically because it raises monitoring costs. As a result monitoring is reduced and incentives become more powerful. This choice is particularly likely when the worker's effort is an important factor in determining output. We provide some supportive evidence from the French water purification industry. There, difficult purification tasks tend to be outsourced, while easy ones are carried out by the municipalities.

Keywords: Incentive scheme, integration, outsourcing, credibility

JEL Classification: H2

Suggested Citation

Bental, Benjamin and Deffains, Bruno and Demougin, Dominique, Credibility and Monitoring: Outsourcing as a Commitment Device (December 18, 2008). European Business School Research Paper No. 09-08, Available at SSRN: https://ssrn.com/abstract=1372520 or http://dx.doi.org/10.2139/ssrn.1372520

Benjamin Bental (Contact Author)

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

Bruno Deffains

Université Paris II - Panthéon-Assas ( email )

12 place du Pantheon
Paris cedex 05, 75005
France

Institut Universitaire de France ( email )

103, bld Saint-Michel
75005 Paris
France

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

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