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Optimal Information Management: Organizations versus Markets

Author

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  • Castanheira, Micael
  • Leppämäki, Mikko

Abstract

This Paper examines the optimal structure of management when a decision-maker must have a mass of information processed before making a decision. They can either delegate processing tasks inside their own organization, in which case they retain full authority over the agents, or they hand over this authority to an outside supplier by outsourcing these activities. By incorporating authority in a stylized model of information processing, we endogenize the comparative advantage of each form of delegation, and provide novel microfoundations for the make-or-buy decision. We outline precise conditions under which giving up authority is optimal. We also show which tasks should be outsourced to align the preferences of the outside supplier with those of the decision-makers, and thereby maximize the benefits accruing from outsourcing.

Suggested Citation

  • Castanheira, Micael & Leppämäki, Mikko, 2003. "Optimal Information Management: Organizations versus Markets," CEPR Discussion Papers 4072, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4072
    as

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    References listed on IDEAS

    as
    1. repec:adr:anecst:y:1992:i:25-26:p:13 is not listed on IDEAS
    2. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, vol. 76(4), pages 716-727, September.
    3. Dimitri Vayanos, 2003. "The Decentralization of Information Processing in the Presence of Interactions," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 667-695.
    4. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-1146, September.
    5. Timothy Van Zandt, 1997. "Real-Time Hierarchical Resource Allocation," Discussion Papers 1231, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    authority; boundaries of the firm; delegation; information processing;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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