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The authors characterize equilibrium and efficient modes of production by comparing nested (vertical) outsourcing with … horizontal outsourcing. Nested outsourcing is found to be inefficient unless the cost of monitoring outsourced production lines … market failure in which nested outsourcing is selected when the case dictates that horizontal outsourcing is the efficient …
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I develop a model of public sector contracting based on the multitask framework by Holmström and Milgrom (1991). In this model, an agent can put effort into increasing the quality of a service or reducing costs. Being residual claimants, private owners have stronger incentives to cut costs than...
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