Hierarchies, Relational Contracts and New Forms of Outsourcing

ICER Working Paper No. 22/2005

27 Pages Posted: 26 Nov 2005

See all articles by Ulrike Muehlberger

Ulrike Muehlberger

Vienna University of Economics and Business Administration; International Centre for Economic Research (ICER)

Date Written: September 2005


We observe that economic restructuring is significantly changing organizational governance. On the one hand, we witness an increase in mergers & acquisitions, which substitutes markets for hierarchies and, on the other hand, we see an increase in outsourcing and subcontracting activities, appearing to replace hierarchies by markets. However, there is evidence that an increasing part of outsourcing activities mix hierarchies with market forms of governance. The key argument of this paper is that firms have established governance structures based on markets, hierarchies and self-enforcing relational contracts so that they are able to keep a substantial amount of control despite of sourcing out labour. Furthermore, we argue that such hierarchical forms of outsourcing produce dependency. Using empirical evidence of the Austrian insurance industry, it is demonstrated that dependency is created, firstly, by the contractual restriction of alternative uses of resources, secondly, by support measures that bind the upstream party closely to the downstream party, thirdly, by relationship-specific investments made by the upstream party, and fourthly, by authority elements.

Suggested Citation

Muehlberger, Ulrike, Hierarchies, Relational Contracts and New Forms of Outsourcing (September 2005). ICER Working Paper No. 22/2005, Available at SSRN: https://ssrn.com/abstract=854865 or http://dx.doi.org/10.2139/ssrn.854865

Ulrike Muehlberger (Contact Author)

Vienna University of Economics and Business Administration ( email )

Welthandelsplatz 1
Vienna, Wien 1020

International Centre for Economic Research (ICER)

Villa Gualino
Viale Settimio Severo, 63
10133 Torino

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