Controlling vs. Enabling

How does a firm decide whether to employ professionals and control how they deliver services to clients, or to operate as a platform enabling independent professionals to provide services directly to clients? Similarly, how does a manufacturer decide whether to allow sales agents to choose certain costly actions (e.g., kickbacks to clients) or to take control of these actions itself? We answer this question using a principal–agent framework in which both the principal and the agent must be incentivized to carry out investments (or effort) that increase the revenue they jointly create. Our theory explains when the principal should take control over a particular decision (“control”) or should instead allow the agent to make the decision (“enable”). It does so both for the case when there are multiple such transferable decisions for a single agent, and for the case when there are many agents and one transferable decision for each. We also consider the possibility of cost asymmetries between the principal and the agent, spillovers across agents, and the misclassification of the principal as an employer even though agents are allocated the relevant control rights. Finally, we explain how the “control versus enable” choice and its associated trade-offs differ from the classic “make versus buy” choice.

The online appendix is available at https://doi.org/10.1287/mnsc.2017.2956.

This paper was accepted by Joshua Gans, business strategy.