Equilibrium strategy for human resource management with limited effort: in-house versus outsourcing

  • Man Xu
  • Wansheng TangEmail author
  • Ruiqing Zhao
Methodologies and Application


When outsourcing human resource activities to a vendor, a firm with limited effort may want to save energy to focus on core competencies. However, the firm could also lose control over these activities by outsourcing, especially in a situation with unobservable action, and this could in turn increase cost. In this paper, we consider a firm with limited effort performing core and non-core human resource activities and aiming to choose an appropriate human resource management strategy, in-house or outsourcing within a framework of agency theory. We show that only when the effort ceiling is low enough, will the firm completely commit to its core activities. Surprisingly, under outsourcing strategy with double moral hazard, we find that both of the vendor and the firm distort their efforts. Moreover, the outsourcing strategy is optimal if the effort ceiling is low enough or if the cost of the non-core activities is high and the positive interaction between the two activities is low. Otherwise, the firm prefers the in-house strategy, especially in the case with a high effort ceiling and unobservable action. In addition, we also find that a high revenue generation capacity for the core activities may increase the motivation of the firm for outsourcing.


Human resource outsourcing Limited effort Double moral hazard Contracts 



This work was supported by the National Natural Science Foundation of China under Grant Nos. 71371133 and 71771164.

Compliance with ethical standards

Conflict of interest

All authors have no conflict of interest.

Human and animal rights

This article does not contain any studies with human participants or animals performed by any of the authors.


  1. Akan M, Ata B, Lariviere MA (2011) Asymmetric information and economies of scale in service contracting. Manuf Serv Oper Manag 13(1):58–72CrossRefGoogle Scholar
  2. Albertson D (2000) Outsourcing shows limited impact for strategic HR. Empl Benefit News 14(10):70Google Scholar
  3. Allon G, Federgruen A (2008) Outsourcing service processes to a common service provider under price and time competition.
  4. Baiman S, Fischer PE, Rajan MV (2000) Information, contracting, and quality costs. Manag Sci 46(6):776–789CrossRefGoogle Scholar
  5. Belcourt M (2006) Outsourcing—the benefits and the risks. Hum Resour Manag Rev 16(2):269–279CrossRefGoogle Scholar
  6. Bhattacharyya S, Lafontaine F (1995) Double-sided moral hazard and the nature of share contracts. RAND J Econ 26(4):761–781CrossRefGoogle Scholar
  7. Cachon GP, Zhang F (2006) Procuring fast delivery: sole sourcing with information asymmetry. Manag Sci 52(6):881–896CrossRefzbMATHGoogle Scholar
  8. Chen Y, Chen W (2019) Incentive contracts of knowledge investment for cooperative innovation in project-based supply chain with double moral hazard. Soft Comput. Google Scholar
  9. Fu Y, Chen Z, Lan Y (2018) The impacts of private risk aversion magnitude and moral hazard in R&D project under uncertain environment. Soft Comput 22(16):5231–5246CrossRefzbMATHGoogle Scholar
  10. Gilley KM, Greer CR, Rasheed AA (2004) Human resource outsourcing and organizational performance in manufacturing firms. J Bus Res 57(3):232–240CrossRefGoogle Scholar
  11. Gospel H, Sako M (2010) The unbundling of corporate functions: the evolution of shared services and outsourcing in human resource management. Ind Corp Change 19(5):1367–1396CrossRefGoogle Scholar
  12. Greer CR, Youngblood SA, Gray DA (1999) Human resource outsourcing: the make or buy decision. Acad Manag Exec 13(3):85–96Google Scholar
  13. Gurchiek K (2005) Record growth: outsourcing of HR functions. HR Mag 50(6):35–36Google Scholar
  14. Hallikas J, Lintukangas K (2016) Purchasing and supply: an investigation of risk management performance. Int J Prod Econ 171:487–494CrossRefGoogle Scholar
  15. Holmstrom B (1982) Moral hazard in teams. Bell J Econ 13(2):324–340CrossRefGoogle Scholar
  16. Kim SH, Netessine S (2013) Collaborative cost reduction and component procurement under information asymmetry. Manag Sci 59(1):189–206CrossRefGoogle Scholar
  17. Li X, Li Y (2016) Optimal service contract under cost information symmetry/asymmetry. J Oper Res Soc 67(2):269–279CrossRefGoogle Scholar
  18. Ren ZJ, Zhang F (2009) Service outsourcing: capacity, quality, and correlated costs. Working paper, School of Management, Boston University, BostonGoogle Scholar
  19. Robinson M, Kalakota R (2004) Offshore outsourcing: business models, ROI and best practices. Mivar Press, AlphareffaGoogle Scholar
  20. Roels G, Karmarkar US, Carr S (2010) Contracting for collaborative services. Manag Sci 56(5):849–863CrossRefGoogle Scholar
  21. Tremblay M, Patry M, Lanoie P (2008) Human resources outsourcing in Canadian organizations: an empirical analysis of the role of organizational characteristics, transaction costs and risks. Int J Hum Resour Manag 19(4):683–715CrossRefGoogle Scholar
  22. Ulrich D (1998) A new mandate for human resources. Harv Bus Rev 76:124–134Google Scholar
  23. Xiao W, Xu Y (2012) The impact of royalty contract revision in a multistage strategic R&D alliance. Manag Sci 58(12):2251–2271CrossRefGoogle Scholar
  24. Xie W, Zhao Y, Jiang Z, Chow PS (2016) Optimizing product service system by franchise fee contracts under information asymmetry. Ann Oper Res 240(2):709–729MathSciNetCrossRefzbMATHGoogle Scholar
  25. Yang X, Zhang RQ, Zhu K (2017) Should purchasing activities be outsourced along with production? Eur J Oper Res 257(2):468–482MathSciNetCrossRefzbMATHGoogle Scholar
  26. Zha Y, Zhang J, Yue X, Hua Z (2015) Service supply chain coordination with platform effort-induced demand. Ann Oper Res 235(1):785–806MathSciNetCrossRefzbMATHGoogle Scholar
  27. Zhang J, Zha Y, Yue X, Hua Z (2015) Dominance, bargaining power and service platform performance. J Oper Res Soc 67(2):312–324CrossRefGoogle Scholar
  28. Zhao Z, Yang G, Xu J (2018) Managerial compensation and research and development investment in a two-period agency setting. Soft Comput 22(16):5453–5465CrossRefzbMATHGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.College of Management and EconomicsTianjin UniversityTianjinChina

Personalised recommendations