Optimal Information Management: Organizations versus Markets

Micael Castanheira and Leppämäki, Mikko

No 4072, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: D21 D73 L22 (search for similar items in EconPapers)
Date: 2003-09
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