Economics 1021A/B Study Guide - Quiz Guide: Bounded Rationality, Outsourcing

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: bruce hammond

Document Summary

Outsourcing an activity on the vertical chain requires a contract and its setup is costly. Additionally, there are other reasons related to contracts between the two partners which act in favor of making it yourself. Contracts are valuable, in part, because they list the set of tasks that each contracting party expects the other to perform and also specify consequences in the event that one party does not fulfill its obligations. Shortly, a contract defines the conditions of exchange because of the lack of trust in the business world. The effectiveness depends on two factors: completeness of the contract. A complete contract eliminates opportunities for shirking by manifesting each party"s responsibilities and rights for each and every contingency that could conceivably arise during the transaction. The parties must also be able to stipulate what constitutes satisfactory performance and must be able to measure performance.