Enabling versus Controlling

Abstract

We study the choice that a firm makes between an employment mode, in which the firm controls service provision by employing professionals, sales representatives, or other types of agents, and an agency mode, in which the firm enables agents to provide their services on terms that they control. The choice of mode is determined by the need to balance double-sided moral hazard problems arising from investments that only agents can make and investments that only the firm can make, while at the same time minimizing distortions in decisions that either party can make. Distortions arise due to the need to share revenues and because of spillovers. Surprisingly, increasing the magnitude of negative spillovers across agents can shift the tradeoff in favor of the agency mode, and provided negative spillovers are not too strong, increasing the agents' (respectively, the firm's) moral hazard can shift the tradeoff in favor of the employment (respectively, the agency) mode.