The When and How of Delegated Search

39 Pages Posted: 4 Oct 2019

See all articles by Sasa Zorc

Sasa Zorc

University of Virginia - Darden School of Business

Ilia Tsetlin

INSEAD

Sameer Hasija

INSEAD - Technology and Operations Management

Date Written: October 3, 2019

Abstract

Search models have traditionally been used to describe situations such as the development of new technology, job search, and the search for profitable investment opportunities. We address the problem faced by a firm that must conduct a search and therefore contemplates outsourcing that process. This paper models the firm's problem in a dynamic principal-agent framework while embedding the standard model of sequential search. We identify the conditions under which it is preferable to outsource the process (rather than conducting the search in-house) and describe the optimal contracting mechanism through which to compensate the searching agent. The optimal contract is structured as follows: pay the agent a fixed fee in each period as well as a bonus whenever a suitable alternative is found, where the size of the bonus is defined a priori and decreases over time. This contract has several desirable properties. Namely, it is the result of optimization over the entire contract space, it is both history independent and renegotiation proof, and no variables need to be verifiable by a third party if the time horizon is short enough. Whether or not to outsource a search process reduces to evaluating the principal's trade-of between speed and quality. The age-old aphorism “if you want it done right, do it yourself" holds, since in-house search is optimal for a principal who prioritizes quality. Yet in this particular setting, we also establish an addendum: “if you want it done fast, hire someone else to do it."

Keywords: Search, Contract Theory, Dynamic Programming

Suggested Citation

Zorc, Sasa and Tsetlin, Ilia and Hasija, Sameer, The When and How of Delegated Search (October 3, 2019). INSEAD Working Paper No. 2019/44/DSC/TOM; Darden Business School Working Paper No. 3463626. Available at SSRN: https://ssrn.com/abstract=3463626 or http://dx.doi.org/10.2139/ssrn.3463626

Sasa Zorc

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://https://www.darden.virginia.edu/faculty-research/directory/sasa-zorc

Ilia Tsetlin (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Sameer Hasija

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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