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Licensed Unlicensed Requires Authentication Published by De Gruyter September 21, 2012

Experience Benefits and Firm Organization

  • Ingela Alger EMAIL logo , Ching-to Albert Ma and Regis Renault

Abstract

A principal needs a worker for the production of a good. The worker can be hired as an internal agent, or an external agent under a contract. These two organizational modes correspond to in-house production and outsourcing, respectively. In each case, the agent earns experience benefits: future monetary returns from managing production, reputation, and enjoyment. The principal would like to extract experience benefits, and can do so when production is outsourced. However, the external agent earns information rent from private information about production costs. The principal cannot fully extract experience benefits when production is in-house because the internal agent must be provided with a minimum income, although the principal has full information on production costs. Our theory proposes a new trade-off, one between information rent under outsourcing and experience rent under in-house production. The principal chooses outsourcing when experience benefits are high, but her organizational choice may be socially inefficient.

Published Online: 2012-9-21

©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

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