This article delves into the intriguing dynamics of how information asymmetry impacts task allocation between a manufacturer and its supplier.
The authors specifically focus on scenarios where tasks exhibit horizontal differentiation, and the comparative edge in terms of marginal costs fluctuates throughout the production process. Our findings illustrate that the manufacturer tends to excessively outsource tasks to a generalist supplier, while not leveraging enough from a specialist supplier based on the efficiency spectrum.
The underlying driver of these patterns lies in the presence of balancing incentives. Interestingly, when the manufacturer’s internal costs are acceptably low, it opts to offload some of its high-performing tasks while keeping the underperforming ones in-house. These dual distortions occur simultaneously, thereby influencing the contract offered to the generalist supplier.