Outsourcing conditions are analyzed for three contract types: price-only contracts; incomplete contracts; and state-dependent price-only and incomplete contracts. Using the game-theoretic model, it is shown that sometimes firms may be better off leaving some contract parameters unspecified ex-ante and agreeing to negotiate ex-post. In addition, there is a possibility for a price-focused strategy for managing subcontractors to backfire. Lastly, as with financial options, the option value of subcontracting increases as markets are more volatile or more negatively correlated.
ASJC Scopus subject areas
- Strategy and Management
- Management Science and Operations Research