Working Paper: CEPR ID: DP4072
Authors: Micael Castanheira; Mikko Leppämäki
Abstract: This Paper examines the optimal structure of management when a decision-maker must have a mass of information processed before making a decision. They can either delegate processing tasks inside their own organization, in which case they retain full authority over the agents, or they hand over this authority to an outside supplier by outsourcing these activities. By incorporating authority in a stylized model of information processing, we endogenize the comparative advantage of each form of delegation, and provide novel microfoundations for the make-or-buy decision. We outline precise conditions under which giving up authority is optimal. We also show which tasks should be outsourced to align the preferences of the outside supplier with those of the decision-makers, and thereby maximize the benefits accruing from outsourcing.
Keywords: Authority; Boundaries of the firm; Delegation; Information processing
JEL Codes: D21; D73; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aligned interests (L20) | outsourcing leads to efficiency gains (L24) |
| misalignment of preferences (D79) | loss of authority can be costly (G18) |
| congruence between principals (C38) | value of outsourcing increases (L24) |
| outsourcing (L24) | efficiency improvements (D61) |
| loss of authority (Y70) | principals may prefer to retain control (D23) |