Controlling Moral Hazard in Service Outsourcing with Reputation Mechanism

Abstract:

Taking cooperation time range into consideration, this paper investigates into the control of the moral hazard caused by the contractor in outsourcing in long term cooperation. The paper presents the evolution mechanism of the agent’s reputation, therefore, the reputation’s implicit effect on restraining the agent’s moral hazard is revealed, and the critical condition is discovered when the reputation became invalidated. A strong reputation mechanism for the principal is proposed, and an analysis is made of its feasibility and the corresponding conditions for a thorough elimination of the moral hazard. In the end, numerical analyses are made of the conclusion and its sensitivity.