Outsourcing as a Cooperative Game between the CEO and Labor : Theory and Evidence

We develop a model of a cooperative power game between a chief executive officer (CEO) and labor over a proposed corporate outsourcing, and test the model’s predictions concerning the decision to outsource, division of profits, and post-outsourcing firm performance using a sample of outsourcing deals by US firms. In accord with the model, we find that a firm is more likely to outsource when CEO power is greater, production costs are higher, and the industry is more homogeneous. Notably, we find that the outsourcing decision does not affect the CEO’s share of profits, and that CEO power is positively related to post-outsourcing performance. Additionally, poor prior firm performance moderates the power dynamics between the CEO and labor. These findings imply that labor can supplement traditional governance mechanisms and act as an effective managerial monitor when the firm undergoes a major restructuring