This paper demonstrates that input prices need not reflect the costs of an efficient incumbent supplier in order to induce entrants to implement efficient make-or-buy decisions. Because of strategic downstream considerations, entrants may always undertake efficient make-or-buy decisions, regardless of the prices at which they are authorized to buy key inputs from incumbent suppliers.

Sourcing, Make-or-Buy decisions, Product quality, Unverifiable information

Responsibility accounting, Principal-agent model, Performance, Hierarchical relationship

Expertise, Communication, Planning, Implementation

Line-item reporting, Principal-agent model, Disaggregation, Factor acquisition models

We examine the choice of organizational mode for a two-stage production process wherein cost realizations at each stage are observed only by the producing party. When these costs are positively correlated, the principal prefers to undertake second-stage production herself. When the correlation is negative and sufficiently small, she will prefer that the agent who performs the first stage also perform the second. For large negative correlation, either mode might be preferred. When costs are uncorrelated, the principal is indifferent between modes.

The authors analyze how to award a monopoly franchise when the objective is to maximize expected consumers' surplus net of transfer payments to the producer. Potential producers initially possess independent private information about uncertain production costs. Only the chosen producer subsequently observes realized production costs. After awarding the franchise to the producer with the lowest expected costs, prices are optimally set above realized marginal cost. These ex post distortions foster more competitive bidding ex ante. The distortions for any bid-cost pair are invariant to the number of bidders, n, though expected distortions and profits decline with n.

The article focuses on accounting systems disclosing income information. Income measurement entails reporting in each time period: present-period cash flows; and an accrual measure based on these cash flows and the change in the expected present values of future cash flows. Information disclosure is ensured if one can always identify which of the possible events in a given event structure has occurred in each time period. D. Vickrey introduces the concept of "weak transparency," referring to the special case of a null information structure. Under the null information structure, there is a constant mapping from underlying states of nature to the set of reported events (or the possible messages to be conveyed). There is essentially no information to be conveyed by income measurement when the information structure is null, so the invertibility condition is satisfied trivially. The main implication of the "possibility result" is that the ability of an accounting system to convey information is not constrained by a requirement that it value assets or measure income.