The role of performance measure noise in mediating the relation between task complexity and outsourcing

Abstract

This paper examines the effect of task complexity on a firm’s decision to outsource and the mediating role of performance measure noise. Using insights from agency and transaction cost economics theories, we predict that task complexity reduces the extent of outsourcing of the task. We further predict that one reason for the negative relation between task complexity and outsourcing is that task complexity increases the noise in performance measures. Noisy performance measures introduce problems in incentive contracting with external vendors and, hence, decrease the extent of outsourcing. Data from 305 inpatient and 1,255 ancillary and outpatient departments of for-profit hospitals provide support for our prediction that performance measure noise mediates the relation between task complexity and outsourcing.