INCOMPLETE INFORMATION, TASK ASSIGNMENT, AND MANAGERIAL CONTROL-SYSTEMS

A firm typically assigns multiple tasks it must perform to either inte rnal employees or outside vendors. This paper demonstrates the need to integrate a task assignment decision with the design of a managerial control system as each affects the other. An internal employee is dist inguished from an outside supplier on four different informational dim ensions: (i) at the time of contracting, the outside supplier has less information about the task environment more often than the internal e mployee; (ii) the principal observes the employee's information set mo re frequently than that of the supplier; (iii) the principal can exerc ise a greater control over information flow to the internal employee t han to the outside supplier; and (iv) the principal may share the deta ils of the outside supplier's contract with the internal employee but not vice versa. Under each of these lour distinguishing dimensions, th e principal is shown to outsource the upstream task and assign the dow nstream task to the internal employee more often than vice versa. Furt her, under the last two dimensions of the firm's boundary, the princip al can eliminate inefficiencies arising from the agents' contracting w ith incomplete information by assigning the downstream task to the emp loyee and not providing predecision information to him while assigning the upstream task to the supplier.