Optimal Information Management: Organizations Versus Markets

34 Pages Posted: 19 Nov 2003

See all articles by Micael Castanheira

Micael Castanheira

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR)

Mikko Leppämäki

Aalto University

Date Written: September 2003

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.

Keywords: Information processing, boundaries of the firm, authority, delegation

Keywords: Information processing, boundaries of the firm, authority, delegation

JEL Classification: D21, D73, L22

Suggested Citation

Castanheira, Micael and Leppämäki, Mikko, Optimal Information Management: Organizations Versus Markets (September 2003). CEPR Discussion Paper No. 4072. Available at SSRN: https://ssrn.com/abstract=470901

Micael Castanheira (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 4467 (Phone)
+32 2 650 3369 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mikko Leppämäki

Aalto University ( email )

Graduate School of Finance (GSF)
P.O. Box 21220 (Runeberginkatu 22-24)
Helsinki, Aalto 00076
Finland
+358-9-470-38967 (Phone)
+358-9-470-38678 (Fax)

HOME PAGE: http://gsf.aalto.fi/html_people/gsf_mikko.html

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