The When and How of Delegated Search
39 Pages Posted: 4 Oct 2019
Date Written: October 3, 2019
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
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