Partial outsourcing: A real options perspective

We apply a real options approach to develop a general characterization of a firm's optimal organizational mode. We find that the optimal threshold for the establishment of (partial) outsourcing is an increasing function of the underlying market uncertainty. Further, we show that increased market uncertainty induces a higher optimal proportion of outsourced production once the threshold is reached and once this threshold prescribes partial outsourcing. (c) 2006 Elsevier B.V All rights reserved.