Efficient Organization of Production: Nested Versus Horizontal Outsourcing

24 Pages Posted: 19 Sep 2009

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Rune Stenbacka

Hanken School of Economics

Date Written: September 8, 2009

Abstract

The authors characterize equilibrium and efficient modes of production by comparing nested (vertical) outsourcing with horizontal outsourcing. Nested outsourcing is found to be inefficient unless the cost of monitoring outsourced production lines increases sharply with the number of subcontractors and not only with the number of outsourced components. They characterize a market failure in which nested outsourcing is selected when the case dictates that horizontal outsourcing is the efficient outsourcing mode. This failure occurs at an intermediate range of the costs of monitoring outsourcing to several subcontractors.

Keywords: outsourcing, subcontracting, nested outsourcing, horizontal outsourcing, efficient organization of outsourcing

JEL Classification: D2, L2, L24

Suggested Citation

Shy, Oz and Stenbacka, Rune, Efficient Organization of Production: Nested Versus Horizontal Outsourcing (September 8, 2009). Federal Reserve Bank of Boston Working Paper No. 09-9. Available at SSRN: https://ssrn.com/abstract=1475320 or http://dx.doi.org/10.2139/ssrn.1475320

Oz Shy (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/shy-oz.aspx

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

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