Peter Chalos held faculty positions at Michigan State and the University of Michigan before joining the Accounting Department at the University of Illinois at Chicago, where he is currently associate dean. He is a visiting fellow at City University in Hong Kong. He has published a textbook and over 30 articles in the managerial accounting area, in such journals as the Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, and Decision Sciences. He has also consulted with numerous firms, including Arthur Andersen, AMOCO, Motorola, Cincinnati Gas, and ServiceMaster.
Outsourcing Decisions and Managerial Incentives*
Article first published online: 7 JUN 2007
Volume 29, Issue 4, pages 901–919, September 1998
How to Cite
Chalos, P. and Sung, J. (1998), Outsourcing Decisions and Managerial Incentives. Decision Sciences, 29: 901–919. doi: 10.1111/j.1540-5915.1998.tb00881.x
We are grateful to an anonymous associate editor and two referees for helpful comments and suggestions.
- Issue published online: 7 JUN 2007
- Article first published online: 7 JUN 2007
- Received: June 25, 1996. Accepted: December 17, 1997.
- Subject Areas: Agency Problems;
- Make/Buy Models;
- and Supplier Partnerships.
An agency model is presented in which outsourcing strictly dominates in-house production. We argue that firms outsource in order to improve managerial incentives. Conditions are established under which the firm is strictly better off with outsourcing. The benefit of outsourcing, however, is constrained by the trade-off between the incremental coordination costs of outsourcing and the improved incentive structure. The optimal contract is also shown to be a function of whether or not the firm is publicly held. For a publicly held firm, the contract is constant. For a privately held supplier, the contract is likely to be of a cost-sharing type. These findings offer preliminary incentive explanations for commonly observed outsourcing practices.