The Hanson Clinic is a well-regarded medical center located in a semirural area in the Midwest . One of its specialty areas is treating rare forms of cancer. To support this activity Hanson wants to construct a new lab. The lab will require very specialized equipment, a specially designed building, and a skilled staff. The estimated cost of the equipment and building is $50 million. The Clinic is considering three possible organizational arrangements. The first is vertical integration. The second is outsourcing (where another company constructs the building, purchases the equipment and provides contractual services to the clinic). The third is for the clinic to purchase the equipment and building, and lease them to an independent operator (who would provide contractual services to the clinic). Discuss the pluses and minus of each of the three alternative structures. What factors do you think are most important in making this choice?

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Pluses Minuses Low holdup problems Possibly have more control over quality of production lab manager to care about |(independent contractor will have some incentives to shirk on quality). Low-powered incentives for Integration costs, etc. High-powered incentives for the lab manager to cut costs and be efficient. Hold-up problem. Might shirk on quality. Outsourcing Relatively low hold-up problem. High-powered incentives for the lab manager to cut costs and be equipment. Might shirk on efficient. Low incentives for the lab manager to maintain the Leasing quality.