Coordination Costs and the Optimal Partition of a Product Design
The purpose of this paper is to analyze the problem of optimally partitioning a design process of a complex product, and to derive several comparative statics results by utilizing the technique developed by Topkis (1998). By partitioning the product design and assigning each sub-design to a team, there are the benefit of having many smaller real options on the one hand, and the cost esulting from an increased incidence of across-team coordination on the other. Furthermore, by endogenizing the across-team coordination costs, our analysis shows that lower cost of within-team coordination induces coarser partitions and higher costs of acrossteam coordination, i.e. lower level of information and communication technology (ICT)investment. It is argued that these results may explain the reason for the retarded introduction of the ICT by Japanese firms in the 1970s and 1980s as well as the difference of performance between Route 128 and Silicon Valley in the 1990s. It is also argued that our results are consistent with the empirical finding by Brynjolfsson, Maline, Gurbaxani, and Kambil (1994) that ICT leads to decreases in firm size.
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- Becker, Gary S & Murphy, Kevin M, 1992.
"The Division of Labor, Coordination Costs, and Knowledge,"
The Quarterly Journal of Economics,
MIT Press, vol. 107(4), pages 1137-60, November.
- Gary S. Becker & Kevin M. Murphy, 1994. "The Division of Labor, Coordination Costs, and Knowledge," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 299-322 National Bureau of Economic Research, Inc.
- Gary S. Murphy Becker & Kevin M., 1992. "The Division of Labor, Coordination Costs, and Knowledge," University of Chicago - George G. Stigler Center for Study of Economy and State 79, Chicago - Center for Study of Economy and State.
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- Wernerfelt, Birger, 2003.
4278-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
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- Schaefer, Scott, 1999. "Product design partitions with complementary components," Journal of Economic Behavior & Organization, Elsevier, vol. 38(3), pages 311-330, March.
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