Strategic outsourcing and optimal procurement

- I study a procurement problem where a buyer has to purchase from one of two sellers.
- Each seller can ex ante decide to become an uninformed intermediary by outsourcing.
- Mechanisms are designed in a sequentially rational way.
- I provide a strategic rationale for outsourcing that does not rely on cost savings.
- In two extensions, I analyze outsourcing with cost savings and nested outsourcing.

I study a procurement problem where each seller can ex ante decide to become an intermediary by outsourcing production to a subcontractor. Production costs are independently distributed and privately learned by the producer in each supply chain. I provide a rationale for outsourcing that relies on procurement and subcontracting mechanisms being designed in a sequentially rational way but not on cost savings. I show how my rationale extends to the case with cost savings and I discuss the sellers' incentives to engage in nested outsourcing. The driving force behind my rationale is that outsourcing makes the distribution of a seller's cost of providing the product more dispersed. I explain also how my analysis extends to problems where such a dispersion arises for other reasons than outsourcing.