Article ID: | iaor20105923 |
Volume: | 41 |
Issue: | 3 |
Start Page Number: | 573 |
End Page Number: | 594 |
Publication Date: | Aug 2010 |
Journal: | Decision Sciences |
Authors: | Talluri Srinivas, Jiang Bin, Yao Tao, Moon Yongma |
Keywords: | outsourcing |
This research utilizes real options theory to investigate how to break the winner's curse in contracting through effective contracting mechanisms. We focus on two contracting approaches: flexible price contract and gain-sharing contract. For reasons of analytical tractability, we first utilize the geometric Brownian motion as the dynamic model to obtain closed-form solutions to break the outsourcing winner's curse. Subsequently, we extend our model to the mean-reverting process and provide numerical examples to verify the validity of our closed-form results, which have not previously been presented in the outsourcing literature. Finally, we provide prescriptions for the problem of the winner's curse in outsourcing.