Outsourcing, Product Quality And Contract Enforcement

Date Added: Aug 2009
Format: PDF

Does outsourcing compromise product quality? Does sound con-tract enforcement alleviate this concern? Using data from a survey of firms in China conducted by the World Bank, the author confirm that out-sourcing does compromise product quality, but the negative impact of outsourcing on product quality is mitigated by the effectiveness of contract enforcement. This paper offers a simple model to illustrate how out-sourcing leads to lower product quality and how contract enforcement helps alleviate this problem.