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An Incomplete Contracts Theory of Information, Technology and Organization

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  • Erik Brynjolffson

Abstract

Although there is good reason to expect that the growth of information work and information technology will significantly affect the trade-offs inherent in different structures for organizing work, the theoretical basis for these changes remains poorly understood. This paper seeks to address this gap by analyzing the incentive effects of different ownership arrangement in the spirit of the Grossman-Hart-Moore (GHM) incomplete contracts theory of the firm. A key departure from earlier approaches is the inclusion of a role for an "information asset", analogous to the GHM treatment of property. This approach highlights the organizational significance of information ownership and information technology. For instance, using this framework, one can determine when 1) informed workers are more likely to be owners than employees of firms, 2) increased flexibility of assets will facilitate decentralization, and 3) the need for centralized coordination will lead to centralized ownership. The framework developed sheds light on some of the empirical findings regarding the relationship between information technology and firm size and clarifies the relationship between coordination mechanisms and the optimal distribution of asset ownership. While many implications are still unexplored and untested, building on the incomplete contracts approach appears to be a promising avenue for the careful, methodical analysis of human organizations and the impact of new technologies.

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Bibliographic Info

Paper provided by MIT Center for Coordination Science in its series Working Paper Series with number 126.

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Date of creation: Dec 1991
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Handle: RePEc:wop:mitccs:126

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  1. Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series 214, Research Institute of Industrial Economics.
  2. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  3. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
  4. Sherwin Rosen, 1987. "Transactions Costs and Internal Labor Markets," NBER Working Papers 2407, National Bureau of Economic Research, Inc.
  5. 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.
  6. Brynjolfsson, Erik., 1993. "Information technology and the 'new managerial work'," Working papers 3563-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Mailath, George J & Postlewaite, Andrew, 1990. "Workers versus Firms: Bargaining over a Firm's Value," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 369-80, July.
  8. Winter, Sidney G, 1988. "On Coase, Competence, and the Corporation," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 163-80, Spring.
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Cited by:
  1. Van Alstyne, Marshall W. (Marshall Ware) & Brynjolfsson, Erik. & Madnick, Stuart E., 2003. "Why not one big database? : principles for data ownership," Working papers #94-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Johannes Traxler, 1998. "The Internet, industrial location, and geographic markets," ERSA conference papers ersa98p345, European Regional Science Association.
  3. Marshall Van Alstyne & Erik Brynjolfsson & Stuart Madnick, 1993. "Ownership Principles for Distributed Database Design," Working Paper Series 142, MIT Center for Coordination Science.
  4. Traxler, Johannes, 1999. "From the Space of Flows to a New Business Geography: The Internet, Firm Location, and Clustering," ERSA conference papers ersa99pa125, European Regional Science Association.

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