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| Date: |
March 9, 2011 (Wednesday) |
| Time : |
11:00am - 12:30pm |
| Language : |
English |
| Venue : |
Room 602, Meng Wah Complex, The University of Hong Kong |
| Presented By : |
Mr. Zhijian Cui, PhD Candidate, INSEAD |
| Seminar title : |
Good Selection or Efficient Contracting?
The Choice of Outsourcing Process and Implications of Payment Schemes in Service
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| Abstract: |
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We study the selection and contracting process in which one client without sufficient in-house capabilities seeks to outsource the service needs to one service vendor selected from two ex-ante identical vendors. By comparing two service outsourcing processes --- competitive bidding and sequential contracting --- this study shows the contingencies under which one outsourcing process dominates another. We show in particular that competitive bidding dominates the sequential contracting in most feasible conditions. However, when vendor selection becomes less risky and more costly, the sequential contracting can yield a higher expected payoff for the outsourcer (client) than an optimal competitive bidding. The service outsourcing process hence involves a fundamental trade-off: one cannot simultaneously maximize the chance of selecting the best vendor and the efficiency of contracting with the selected vendor. This study also highlights the implications of payment schemes. We show that under the sequential contracting, adding an additional payment scheme into contract menu enables the client to achieve perfect contract efficiency whereas, under competitive bidding, it increases the client's expected payoff by increasing the competition between vendors. |
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