Make vs Buy

Ownership of assets

If you own assets you are more likely to invest in it, outside of the contract, so that it improves better and benefits you/company.

Investment carries a personal cost which is deducted from overall calculations. As long as investment carries a net positive impact on profits then it will be done. delta pi is the increase in profit from investment and I is the personal investment cost. Pi + delta pi - investment is the surplus. If one surplus is larger than the other, then the other should own the asset (either worker or boss).

The rent is in the form of profit - utility 1 and utility 2. Each utility representing the utility a worker gets. They share this equally(*1/2) and also get an individual utility payment of u.

The workers will invest as long as the gain from investing (delta pi + utility 1)*1/2 is larger than the investment I.

Owning an asset gives incentives to invest in that asset but disincentivises the other party in investing in those relationship-specific assets. No bargaining so efficient contractability of investment leads to under-investment.

Incentives

Ownership of assets give control of residual rights/decision making and confers residual payoffs

You get what you pay

You give up ownership of assets to workers so that worker goals and firm goals are aligned

Surplus(to firm) = Profit + asset value - personal cost

Worker benefit = wage + bonus*performance - personal cost

Worker has two action choices. Need to optimise for each to find optimum course of action. One action is for profit. The other action is for asset value.

But ownership of asset by worker(non-integration) gives excessive incentive for the worker to invest to increase the value of the asset. This reduces surplus.

In integration the asset value is not counted towards the worker's performance the worker will not invest personal cost into improving value of asset. As a result surplus will fall.

Ownership may be the only way to induce the investment into assets by workers. Ownership provides incentives that can't be replicated through owning the asset.

Outsourcing
 * Reasons to do them: Producer has economies of scale/learning, Externalising production may lead to better measurement allowing for higher incentives, Transferring asset ownership may boost incentives.