Controlling Information System Departments in the Presence of Cost Information Asymmetry

Eric T. G. Wang and Terry Barron
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Eric T. G. Wang: Department of Information Management, School of Management, National Central University, Chung-Li, Taiwan 32054, Republic of China
Terry Barron: William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York 14627

Information Systems Research, 1995, vol. 6, issue 1, 24-50

Abstract: The control of an information systems (IS) department is studied when its manager has private information about the department's cost and has objectives which may differ from those of the organization. The computing resource is represented by a queueing model, and it is assumed there is no access to external information processing markets by either users or the IS department. A mechanism design approach is used. We derive conditions that the optimal mechanism must satisfy; the first-order conditions of the full-information problem generalize in a clear way with the virtual marginal cost replacing the full information marginal capacity cost. The consequences of the information asymmetry include reduced capacity, arrival rate and utilization rate, and higher prices and mean waiting time compared to the full-information solution. Thus the organization suffers losses due not only to the IS manager's informational rent, but also to the opportunity cost of jobs not served. The revelation principle guarantees that the resulting mechanism is at least as good as a profit center, as well as outperforming any other centralized method of control. The mechanism design approach is also shown to be robust with respect to uncertainty on the part of the central management about the degree of incentive conflict with the IS manager. An example and numerical results give some feeling for the magnitudes of the effects, and managerial implications are also discussed. The paper also serves to illustrate the application of mechanism design to an IS problem; we briefly discuss other promising IS applications of this important methodology.

Keywords: management of information systems; information asymmetry; mechanism design; capacity; cost center; profit center (search for similar items in EconPapers)
Date: 1995
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