Choice of technology in outsourcing: an endogenous information structure

Abstract

We study a monopsonist-supplier model in which each party has its own technology for production. The supplier may use its own or be required to adopt the buyer's technology. Because the efficiency of each technology is unknown to the other party, the choice of technology determines the informed party. We find that using the buyer's technology reduces not only the supplier's incentive to misrepresent, but sometimes the buyer's as well. As a result, when equally efficient, the buyer's technology is adopted. In cases where each technology has several states of efficiency, the less efficient technology may be assigned in the optimal contract. (C) 2003 Elsevier B.V. All rights reserved.