An Information Economics Approach To Analyzing Information Systems For Cooperative Decision Making

In this paper, we use an information economics approach for analyzing information systems (IS) that are used by multiple decision makers (DM) for making inter-related decisions in a cooperative environment. A decision setting is considered where there may be a precedence relationship between actions, and where one DM's action may be constrained by others' actions. Moreover, an individual DM may not have full information on other DMs' decision parameters. Several interesting results emerge from the analysis. In a two-stage, cooperative decision setting involving a purchasing and a production function, the interactions between the two decisions, and the impact of the IS shared by the DMs on their overall performance are studied. Using team theory, it is shown that when the first DM does not have full information on certain decision parameters of the second DM, the overall cost may increase with a more accurate IS, even when higher accuracy call be obtained for free. The optimal level of informational detail for the two decision makers is studied in conjunction with restricted action sets. We find that the level of detail that can be effectively utilized by the team is determined only by the action set of the second DM. This result provides a basis for determining the information requirements of the DMs as a function of their context parameters. The issue of updating information for the two DMs is also addressed. Endogenizing updating frequency as a decision variable, we show that higher updating frequency of the shared IS may lead to higher cost (or lower payoff), even when the increase in frequency is obtained at zero cost. The results of the paper have implications for better design of information systems supporting distributed decision making in cooperative environments. 1. INTRODUCHON time. For example, what is the optimal level of informational detail of an IS in an inter-related, multi-person, Complex organizational activities involve coordination and cooperative decision making environment? Is more communication among multiple decision makers (DM). accurate information at least as valuable as less accurate The widespread proliferation of information systems (IS) information in the above environment, where a DM may technology has opened up new possibilities for decision not fully know certain decision parameters of other making in such complex, inter-related environments. DMs?1 What is the optimal information updating freThus, there is a growing recognition of the importance of quency for IS that support inter-related decisions? In this designing distributed computing systems that integrate paper, we use the principles of information economics different decision making units of a company. Related and team theory to investigate some of these questions, system design issues that must be addressed include the and to derive managerial guidelines for better design of effectiveness of communication channels between the shared IS. DMs, the type and accuracy of information to be provided to each DM, and the appropriate frequency of The above design issues may be addressed by taking updating information. account of the value of distributed information to the DMs involved. The goal of this paper is to provide While there is a large body of literature on the technical insights into the nature of the design solutions that would aspects of IS for enhancing coordination among decision be obtained by solving large-scale realistic models. makers, the analyses of such IS from the economic Accordingly, we explore a simplified model from which perspective have not been widely conducted in the MIS analytic solutions can be obtained. In this sense, the literature. As a consequence, many economics related paper follows the tradition of micro-economics rather design issues are not well.understood at this point in than operations research.