OPTIMAL ALLOCATION AND BACKUP OF COMPUTER RESOURCES UNDER ASYMMETRIC INFORMATION AND INCENTIVE INCOMPATIBILITY

This paper presents the optimal allocation and backup of computing res ources in a multidivisional firm in the presence of asymmetric informa tion and incentive incompatibility. A game-theoretic model is develope d and transformed to a linear programming problem. The solution to thi s linear programming problem enables the corporate headquarters to des ign a resource allocation scheme such that the revelation principle pr evails and all divisions tell the truth. To cope with the combinatoria l explosion of complexity caused by the resource constraint, a greedy- type algorithm and an averaged version of the original linear programm ing problem are developed to provide the upper and lower bounds. The g reedy-type algorithm generates exact solutions for a wide range of ins tances. The lower bounds coincide with the exact solutions for the cas es where the computer resource is either scarce or abundant. The avera ged-version resource allocation model with slight modifications solves the optimal computer backup capacity problem. It determines how much back up capacity the firm should purchase when the firm's computer bre aks down.