Relative Importance, Specific Investment and Ownership in Interorganizational Systems

Information Technology and Management, 9, 3 (September 2008), 181-200

46 Pages Posted: 27 Aug 2016

See all articles by Kunsoo Han

Kunsoo Han

McGill University

Robert J. Kauffman

Singapore Management University; Singapore Management University - School of Information Systems

Barrie R. Nault

University of Calgary - Haskayne School of Business

Date Written: October 5, 2007

Abstract

Implementation and maintenance of interorganizational systems (IOS) require investments by all the participating firms. Compared with intraorganizational systems, however, there are additional uncertainties and risks. This is because the benefits of IOS investment depend not only on a firm’s own decisions, but also on those of its business partners. Without appropriate levels of investment by all the firms participating in an IOS, they cannot reap the full benefits. Drawing upon the literature in institutional economics, we examine IOS ownership as a means to induce value-maximizing noncontractible investments. We model the impact of two factors derived from the theory of incomplete contracts and transaction cost economics: relative importance of investments and specificity of investments. We apply the model to a vendor-managed inventory system (VMI) in a supply chain setting. We show that when the specificity of investments is high, this is a more critical determinant of optimal ownership structure than the relative importance of investments. As technologies used in IOS become increasingly redeployable and reusable, and less specific, the relative importance of investments becomes a dominant factor. We also show that the bargaining mechanism — or the agreed upon approach to splitting the incremental payoffs — that is used affects the relationship between these factors in determining the optimal ownership structure of an IOS.

Keywords: Economic theory, Incomplete contracts, Interorganizational information systems, Investment specificity, Information systems, IT investments, Ownership, Property rights, Relative importance, Supply chain management

Suggested Citation

Han, Kunsoo and Kauffman, Robert J. and Nault, Barrie R., Relative Importance, Specific Investment and Ownership in Interorganizational Systems (October 5, 2007). Information Technology and Management, 9, 3 (September 2008), 181-200, Available at SSRN: https://ssrn.com/abstract=2608597

Kunsoo Han

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Robert J. Kauffman

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore
65-6828-929 (Phone)

Singapore Management University - School of Information Systems ( email )

80 Stamford Road
Singapore, 178902
Singapore

Barrie R. Nault (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

HOME PAGE: http://ucalgary.ca/bnault

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