Systems on Organizations
Vijay Gurbaxani and Seungjin Whang
Z Z LU 0 Z 0 f-
The adoption of information technology (IT) in organizations has been growing at a rapid pace. The use of the technology has evolved from the automation of structured processes to systems that are truly revolutionary in that they introduce change into fundamental business procedures. Indeed, it is believed that "More than being helped by computers, companies will live by them, shaping strategy and i structure to fit new information technology " While the importance of the relationship between information technology and organizational change is evidenced by the considerable literature on the subject, l there is a lack of comprehensive analysis of these issues from the economic perspective. The aim of this article is I to develop an economic understanding of how information systems affect some key measures of organization structure. This article analyzes the roles of information systems, how they evolve and how they affect organizations and markets. In particular,
we analyze the impact of I T on two i m p o r t a n t attributes o f f i r m s i f i r m size and the allocation of decisionmaking authority a m o n g the various actors in a firm. To this end, we start with economic theories o f organization as the foundation for o u r analysis. Two such theories are relevant to o u r analysis: agency theory, inkially advanced and devel~ o p e d by Wilson , Ross , AIchian and Demsetz , and Jensen and Meckling , and transaction cost economics, whose development is due mainly to Coase , Klein, Crawford and Alchian , and Williamson [65-67]. Agency theory  rejects the classical view o f the firm as a unified profit-maximizing identity and proposes an alternative model o f a firm as an agency relationship built on a set o f contracts a m o n g selfinterested agents (employees). As a consequence, when decisionmaking authority is delegated to agents, it cannot be g u a r a n t e e d that the decisions will be aligned with the interest o f the principal (shareholders). T h e divergence o f interests between the principal and agents can breed n u m e r o u s problems and is costly to a firm (agency costs). Agency theory (of the firm) tries to explain how a firm can be, and why it is, maintained as a viable fbrm ,of economic organization even in the presence o f these problems. Transaction cost economics  approaches this issue from exactly the opposite direction. It starts by looking at problems in using a market and views a firm as a solution to these problems. T h e theory recognizes that the operation o f a m a r k e t is not costless, as is assumed in classical economic theory, and that it is i m p o r t a n t to assess transaction costs in the analysis of economic activities. According to this theory, the firm is a substitute for the market mechanism, created to reduce transactions costs. This article is based on the prem]See [5, 29, 39. 45] for excellent reviews of research on these issues.
ise that firm size and the allocation of decision-making authority among the various actors in a firm are, to a considerable degree, determined by the costs associated with acquiring, storing, processing and disseminating information. Agency theory and transaction cost economics facilitate the development o f the relationships between these information costs and the attributes o f organizations. We present a model o f a firm which incorporates the considerations o f agency costs and transaction costs, as well as operations costs. This framework enables us to study the impact o f information systems on organizations and markets. O u r research, therefore, complements that o f economic and industrial organization theorists by addressing the role of computer-based information systems, which economists traditionally treat as a black box. T h e question o f whether I T induces...