RESEARCH REPORT - INFORMATION TECHNOLOGY AND INVESTMENT INCENTIVES INDISTRIBUTED OPERATIONS

In distributed operations with positive externalities between branches , local underinvestment occurs because one branch does not account for the impact of its actions on other branches. Previous work found that an IT-enabled incentive mechanism called ''ownership of customers'' ( OoC) reduced the problem of local underinvestment by accounting for in ter-branch transactions. This report examines the impact of including investment by a central office on the set of previously developed resu lts for local investment by branches. It shows that ownership of custo mers can reduce the problem of both central and local underinvestment. It also demonstrates how central investment can yield second-best lev els of profitability-optimal profits given contracting problems in loc al investment with branches. It highlights how charging branches a uni t fee to fund the needed level of central investment is consistent wit h that second-best solution.