Endogenous Firm and Information Rent Under Demand Uncertainty
AbstractIncreasing evidence shows that ICT investment improves firm performance. Among the many explanations on why ICT contributed to labor productivity surge since 1990, this is the most promising one. It is thus necessary to take the firm as an information processing organization, putting it in stochastic environment. As perfect information is no longer the assumption, that firms exogenously exist in the economy would no longer be assumed here. With these in mind, the paper provides a model that involves the division of labor and specialization, the production and consumption under demand uncertainty, and the value of information. It shows that under certain business conditions, a firm with certain type of information processing ability comes into being endogenously. A surplus, which could reasonably be argued as information rent, is generated with firm production. The size of this information rent depends on a few key parameters, including the level of uncertainty, the degree of market competition, and the cost of information processing. To test the model, case studies on the financial industry and the wholesale and retail industry are conducted, which corroborate the theoretical predictions of the model.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 13506.
Date of creation: 12 Feb 2009
Date of revision: 16 Feb 2009
demand uncertainty; information processing; firm; information rent;
Find related papers by JEL classification:
- D2 - Microeconomics - - Production and Organizations
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D4 - Microeconomics - - Market Structure and Pricing
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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