Antecedents of agency problems in service outsourcing

Abstract

As outsourcing of services has grown in popularity, agency problems such as adverse selection and moral hazard have become more prevalent, leading to increased contracting costs. In this paper, we focus on how adverse selection and performance ambiguity arise in service outsourcing arrangements. We used agency theory as a theoretical lens to propose a mediated model where two antecedents, information asymmetry and goals compatibility, directly affect performance ambiguity, and indirectly through adverse selection. This model was tested empirically with dyadic data on 50 matched pair service outsourcing arrangements between organisations in Australia. Results show that information asymmetry impacts performance ambiguity through adverse selection, whereas goals compatibility affects performance ambiguity directly, without influencing adverse selection. These results suggest that the two agency problems are differentially affected by the antecedents of service outsourcing. The theoretical and practical contributions of this study are a better understanding of how different agency problems arise and how they can be controlled in service outsourcing in particular and in service production context more generally.