Download or read book Three Essays on the Economics of Information Technology Outsourcing written by Qiang Zeng and published by . This book was released on 2011 with total page 123 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is motivated by a goal to explain frequently observed phenomena in IT outsourcing that are, on face of it, counter-intuitive. In a set of three related essays, we examine why clients transfer critical assets to vendors, even when such asset transfer increases the risk of being "held-up" by a vendor. Moreover, there is considerable heterogeneity in which parties own the assets. We develop an explanation that helps us understand the motivations for asset ownership. Finally, we examine why vendors develop monitoring mechanisms that they share with their clients reducing the likelihood of appropriating rents. In a two period model of asset transfer, we show that asset transfer and contract extension work together to enable clients to incentivize vendors make significant initial investments. Owning the IT assets ensures a vendor about a long-term relationship while significant initial investments enable the vendor to win the contract extension. Then in an economic model that examines whether a vendor or client should own the assets, we show that scenarios exist both where the client and vendor agree on the ownership structure and where they disagree. When investment in innovation enables new services and features, the client should retain ownership of the assets. When investment leads to cost savings, the vendor should own the assets. The parties disagree on asset ownership structure when the investment opportunities yield similar levels of benefits to both vendor and client. In this case neither party wants to own the assets. A firm may also invest to increase the level of verifiability of future investments and thus increase the opportunity to extract more rents from the other party. Finally in a monitoring-signaling model, we show that by committing to costly performance monitoring and convening verifiable signals on his private information to the client, a high capability vendor is able to separate his expected payoff from that of the free-riding low capability vendor. The dynamics of truth-revealing signaling with performance monitoring involves that the client credibly commits to a long-term relationship with the appropriate vendor with incentive contracts contingent on the verifiable signals from performance monitoring.