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Working Papers

Asymmetric information and economies-of-scale in service contracting
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Mustafa Akan, Bariş Ata, Martin A. Lariviere


We consider a contracting problem in which a firm outsources its call center operations to a service provider. The outsourcing firm (which we term the originator) has private information regarding the rate of incoming calls. The per-call revenue (or margin) earned by the firm and the service level depend on the staffing decisions by the service provider. Initially, we restrict attention to pay-per-call contracts under which the parties contract on a service level and a per-call fee. The service provider is modeled as a multi-server queue with a Poisson arrival process, exponentially distributed service times and customer abandonment. We assume that the service provider's queue is large enough such that the economically sensible mode of operation for staffing it is the Quality-and-Efficiency-Driven regime, which allows tractable approximations of various performance metrics. We first consider a screening scenario with the service provider offering a contract to the originator. Due to the statistical economies of scale phenomenon observed in queueing systems, the allocation of the originator with higher arrival rate is distorted, which reverses the typical "efficiency at top" result present in the literature on monopolist screening. We then consider the alternative scenario with the originator offering a contract to signal her information and show that the service level of the high volume firm is again distorted. The introduction of a fixed payment ameliorates distortions from first-best and may eliminate them.

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