Combating overbilling in outsourced projects: A dynamic auditing mechanism

Firms routinely outsource their business requirements to external agents for many reasons; for example, to focus on their core competencies or to save costs. However, overbilling by agents has been well-acknowledged as a notorious problem across major industries, including healthcare, information technology, legal services, and engineering. Mitigating overbilling is challenging in practice; typical options for firms include auditing agents or suspending relationships with them. While firms would like to combat overbilling by utilizing these options, they also want to minimize their total cost, including agents’ payments and auditing costs. We consider a repeated principal–agent setting in which, in each period, the principal makes two decisions: (i) Whether to allocate the task to the agent or an outside option. (ii) If the agent executes the task, whether to audit the agent’s cost. We propose a class of Dynamic Auditing mechanisms under which it is near-optimal for the agent to report his costs truthfully and the principal’s cost is also near-optimal, for sufficiently large discount factors. We study the role of auditing in our dynamic mechanism design framework. We show that auditing is an effective tool for the principal if either (i) the unit cost of auditing is sufficiently small, or (ii) the principal lacks knowledge of the agent’s cost distribution. We also show that our results are robust when there is competition among multiple agents for the principal’s business, and when the agent can deliberately inflate his costs by performing additional (redundant) work.

• 저널Production and Operations Management
• 토픽Auction Theory and Applications · Management Science and Operations Research
• DOI10.1177/10591478261451992
• 저자Like Bu, Shivam Gupta, Milind Dawande, Ganesh Janakiraman