Abstract Using principal-agent model, this paper investigates the impact of business process modularity on incentive contract for Business Process Outsourcing(BPO) under doublesided moral hazard. The results show that when both of the client and the vendor are risk-neutral, to improve the degree of business process modularity enables the vendor to work harder, not necessarily enabling the client to work harder. The vendor with a higher technical level works harder in BPO. Under symmetric information, the vendor’s technology level has no effect on the effort the client makes in BPO. Under asymmetric information, the client makes less effort in BPO when the vendor’ technical level is higher. Under asymmetric information, a higher degree of business process modularity leads to a higher revenuesharing coefficient. When the vendor has high enough technical advantage or cost advantage, the client’s expected revenue decreases as the degree of business process modularity gets higher. When cooperating with a vendor who has a higher level of technology, or/and lower service costs, the customer bears higher agency costs. To improve the degree of process modularity does not necessarily reduce agency costs.
2013, Vol. 10 
