INFORMATION TECHNOLOGY AND ORGANIZATION DESIGN - LOCATING DECISIONS AND INFORMATION

We study the impact of information technology (IT) on the profitabilit y of individual organization designs and on the relative profitability of different organization designs. We develop models where organizati on design is defined by the location of investment decision authority. We consider global and local investment when there is an information asymmetry between a central authority and decentralized nodes-decentra lized nodes make better local investment decisions because of their lo cal knowledge. We define three separate organization designs: a hierar chy where all investments are made by a central authority, a market wh ere all investments are made by the decentralized nodes, and a mixed m ode where global investments are made by a central authority and local investments are made by decentralized nodes. Because of complementari ties between global and local investment, we show that there is underi nvestment relative to first-best in all three organization designs. We also find that IT can be used to mitigate that underinvestment, eithe r by bringing information to the decision maker or by redesigning the monitoring and incentive structure. We demonstrate that IT does not ne cessarily favor decentralized organization designs, and we show how th e costs of coordination may result in the mixed mode being dominated b y one or both of the alternative organization designs. Thus, collocati on of investment decision rights and information that results in decis ions that require coordination might not be optimal when the costs of not synchronizing global and local investment are high.