Date and Time
17 April 2019
3:00 pm - 4:30 pm


Venue
NUS Business School, Mochtar Riady Building, BIZ1, Seminar Room 3-2, 15 Kent Ridge Drive, Singapore 119245
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Organised by: Analytic-operations



Abstract

Search models have traditionally been used to describe situations such as development of new technology, job search, and the search for profitable investment opportunities. We focus on the problem faced by a firm which needs to conduct such a search process, and is considering outsourcing it. We model it in the dynamic principal-agent framework while embedding the standard model of sequential search without recall. We identify under which conditions it is better to outsource this process (as opposed to conducting the search in-house), and find the optimal contracting mechanism through which to compensate the searching agent. The optimal contract has the following structure: pay the agent a fixed fee in each period with an additional bonus once a suitable alternative is found. The size of this bonus is defined a priori and is decreasing over time. This contract has several desirable properties: it is the result of optimization over the entire contract space, it is history independent, negotiation proof, and if the time horizon is short, it does not require any variables to be verifiable by a third party. The decision of whether to outsource the process or no is reduced the principal’s speed-quality tradeoff. The ages old aphorism “if you want it done right, do it yourself” holds, as principal’s sensitivity to quality leads to optimality of in-house search. However, an addendum specific to this setting also holds: “if you want it done fast, hire someone else to do it.”