Real-Time Decentralized Information Processing and Returns to Scale

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Real-Time Decentralized Information Processing and Returns to Scale

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Timothy Van Zandt
Roy Radner

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Timothy Van Zandt

Abstract

We use a model of real-time decentralized information processing to understand how constraints on human information processing affect the returns to scale of organizations. We identify three informational (dis)economies of scale: diversification of heterogeneous risks (positive), sharing of information and of costs (positive), and crowding out of recent information due to information processing delay (negative). Because decision rules are endogenous, delay does not inexorably lead to decreasing returns to scale. However, returns are more likely to be decreasing when computation constraints, rather than sampling costs, limit the information upon which decisions are conditioned. The results illustrate how information processing constraints together with the requirement of informaitonal integration cause a breakdown of the replication arguments that have been used to establish nondecreasing technological returns to scale.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1233.

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Date of creation: Nov 1998
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Handle: RePEc:nwu:cmsems:1233

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Erik J. Brynjolfsson & Thomas Malone & Vijay Gurbaxani & Ajit Kambil, 1991. "Does Information Technology Lead to Smaller Firms?," Working Paper Series 123, MIT Center for Coordination Science. [Downloadable!]
Thomas Marschak, 1996. "On economies of scope in communication," Review of Economic Design, Springer, vol. 2(1), pages 1-31, December. [Downloadable!] (restricted)
Geanakoplos, John & Milgrom, Paul, 1991. "A theory of hierarchies based on limited managerial attention," Journal of the Japanese and International Economies, Elsevier, vol. 5(3), pages 205-225, September. [Downloadable!] (restricted)
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- John Geanakoplos & Paul R. Milgrom, 1988. "A Theory of Hierarchies Based on Limited Managerial Attention," Cowles Foundation Discussion Papers 775R, Cowles Foundation, Yale University. [Downloadable!]
Michael Keren & David Levhari, 1983. "The Internal Organization of the Firm and the Shape of Average Costs," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 474-486, Autumn. [Downloadable!] (restricted)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Kieron Meagher & Andrew Wait, 2008. "Who Decides about Change and Restructuring in Organizations?," CEPR Discussion Papers 587, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University. [Downloadable!]
Wernerfelt, Birger, 2003. "Organizational Languages," Working papers 4278-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
Other versions:
- Birger Wernerfelt, 2004. "Organizational Languages," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 13(3), pages 461-472, 09. [Downloadable!] (restricted)
Stijn Van Nieuwerburgh & Laura Veldkamp, 2008. "Information Acquisition and Under-Diversification," NBER Working Papers 13904, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Van Zandt, Timothy, 2004. "Structure and Returns to Scale of Real-Time Hierarchical Resource Allocation," CEPR Discussion Papers 4277, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Meagher, Kieron & Orbay, Hakan & Van Zandt, Timothy, 2001. "Hierarchy Size and Environmental Uncertainty," CEPR Discussion Papers 2839, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Pranab Bardhan, 2009. "Middlemen Margins and Globalization," Working Papers id:2202, esocialsciences.com. [Downloadable!]

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