On the communication complexity of expected-profit maximization

Models of the behavior of the firm under uncertainty typically assume that the joint probability distribution over all random variables is common know ledge, and only the realized values of some variables are observed differen tially. The main result of this paper shows that if the knowledge of the re levant probabilities is initially decentralized, then expected-profit maxim izing decisions can require unbounded communication, as measured by the min imal message space dimension. The result is obtained in a simple model of a two-period, one product firm with two managers who must communicate in ord er to determine the level of inventory that maximizes expected profit. Jour nal of Economic Literature Classification Numbers: D71, D82, D92. (C) 1999 Academic Press.