IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/13506.html
   My bibliography  Save this paper

Endogenous Firm and Information Rent Under Demand Uncertainty

Author

Listed:
  • Li, Yanfei
  • Yao, Shuntian
  • Chia, Wai-Mun

Abstract

Increasing evidence shows that ICT investment improves firm performance. Among the many explanations on why ICT contributed to labor productivity surge since 1990, this is the most promising one. It is thus necessary to take the firm as an information processing organization, putting it in stochastic environment. As perfect information is no longer the assumption, that firms exogenously exist in the economy would no longer be assumed here. With these in mind, the paper provides a model that involves the division of labor and specialization, the production and consumption under demand uncertainty, and the value of information. It shows that under certain business conditions, a firm with certain type of information processing ability comes into being endogenously. A surplus, which could reasonably be argued as information rent, is generated with firm production. The size of this information rent depends on a few key parameters, including the level of uncertainty, the degree of market competition, and the cost of information processing. To test the model, case studies on the financial industry and the wholesale and retail industry are conducted, which corroborate the theoretical predictions of the model.

Suggested Citation

  • Li, Yanfei & Yao, Shuntian & Chia, Wai-Mun, 2009. "Endogenous Firm and Information Rent Under Demand Uncertainty," MPRA Paper 13506, University Library of Munich, Germany, revised 16 Feb 2009.
    • Handle: RePEc:pra:mprapa:13506
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/13506/1/MPRA_paper_13506.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/14867/1/MPRA_paper_14867.pdf
    File Function: revised version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/19450/3/MPRA_paper_19450.pdf
    File Function: revised version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/21128/2/MPRA_paper_21128.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Carlton, Dennis W, 1978. "Market Behavior with Demand Uncertainty and Price Inflexibility," American Economic Review, American Economic Association, vol. 68(4), pages 571-587, September.
    2. Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243273.
    3. Xiaokai Yang & Yew-Kwang Ng, 2006. "Theory Of The Firm And Structure Of Residual Rights," World Scientific Book Chapters, in: Christis Tombazos & Xiaokai Yang (ed.), Inframarginal Contributions To Development Economics, chapter 10, pages 231-258, World Scientific Publishing Co. Pte. Ltd..
    4. Dale W. Jorgenson & Kevin J. Stiroh, 2000. "Raising the Speed Limit: U.S. Economic Growth in the Information Age," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 125-236.
    5. Masahiko Aoki, 2013. "Horizontal vs. Vertical Information Structure of the Firm," Chapters, in: Comparative Institutional Analysis, chapter 5, pages 57-58, Edward Elgar Publishing.
    6. Kevin J. Stiroh, 2002. "Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?," American Economic Review, American Economic Association, vol. 92(5), pages 1559-1576, December.
    7. Arrow, Kenneth J, 1985. "Informational Structure of the Firm," American Economic Review, American Economic Association, vol. 75(2), pages 303-307, May.
    8. Kenneth J. Arrow, 1975. "Vertical Integration and Communication," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 173-183, Spring.
    9. Nicola Matteucci & Mary O'Mahony & Catherine Robinson & Thomas Zwick, 2005. "Productivity, Workplace Performance And Ict: Industry And Firm‐Level Evidence For Europe And The Us," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(3), pages 359-386, July.
    10. Joseph E. Stiglitz, 2002. "Information and the Change in the Paradigm in Economics," American Economic Review, American Economic Association, vol. 92(3), pages 460-501, June.
    11. Barrios, Salvador & Burgelman, Jean-Claude, 2007. "Information and Communication Technologies, Market Rigidities and Growth: Implications for EU Policies," MPRA Paper 5838, University Library of Munich, Germany.
    12. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    13. Carlton, Dennis W, 1979. "Vertical Integration in Competitive Markets under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 189-209, March.
    14. DeCanio, Stephen J. & Watkins, William E., 1998. "Information processing and organizational structure," Journal of Economic Behavior & Organization, Elsevier, vol. 36(3), pages 275-294, August.
    15. Thomas Marschak, 2004. "Information Technology and the Organization of Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(3), pages 473-515, September.
    16. Erik Brynjolfsson & Lorin M. Hitt, 2000. "Beyond Computation: Information Technology, Organizational Transformation and Business Performance," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 23-48, Fall.
    17. K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 31(2), pages 91-96.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stefanie Haller & Iulia Siedschlag, 2011. "Determinants of ICT adoption: evidence from firm-level data," Applied Economics, Taylor & Francis Journals, vol. 43(26), pages 3775-3788.
    2. Stefanie Haller & Iulia Traistaru-Siedschlag, 2007. "The Adoption of ICT: Firm-Level Evidence from Irish Manufacturing Industries," Papers WP204, Economic and Social Research Institute (ESRI).
    3. Kiley, Michael T., 2001. "Computers and growth with frictions: aggregate and disaggregate evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 55(1), pages 171-215, December.
    4. Dale W. Jorgenson & Mun S. Ho & Kevin J. Stiroh, 2005. "Growth of US Industries and Investments in Information Technology and Higher Education," NBER Chapters, in: Measuring Capital in the New Economy, pages 403-478, National Bureau of Economic Research, Inc.
    5. Henry van der Wiel, 2001. "Does ICT boost Dutch productivity growth?," CPB Document 16.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Harald Edquist & Magnus Henrekson, 2006. "Technological Breakthroughs and Productivity Growth," Research in Economic History, in: Research in Economic History, pages 1-53, Emerald Group Publishing Limited.
    7. Oliner, Stephen D. & Sichel, Daniel E. & Stiroh, Kevin J., 2008. "Explaining a productive decade," Journal of Policy Modeling, Elsevier, vol. 30(4), pages 633-673.
    8. Ajoy Ketan Sarangi & Rudra Prakash Pradhan, 2020. "ICT infrastructure and economic growth: a critical assessment and some policy implications," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 47(4), pages 363-383, December.
    9. Erik Brynjolfsson & Andrew McAfee & Michael Sorell & Feng Zhu, 2007. "Scale without mass: business process replication and industry dynamics," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    10. Crafts, Nicholas, 2002. "The Solow Productivity Paradox in Historical Perspective," CEPR Discussion Papers 3142, C.E.P.R. Discussion Papers.
    11. Guido Schryen, 2010. "Preserving Knowledge on IS Business Value," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 2(4), pages 233-244, August.
    12. Kristina McElheran, 2014. "Delegation in Multi‐Establishment Firms: Evidence from I.T. Purchasing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(2), pages 225-258, June.
    13. Erik Brynjolfsson & Lorin M. Hitt, 2003. "Computing Productivity: Firm-Level Evidence," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 793-808, November.
    14. Hyunbae Chun & Sung‐Bae Mun, 2006. "Substitutability and Accumulation of Information Technology Capital in U.S. Industries," Southern Economic Journal, John Wiley & Sons, vol. 72(4), pages 1002-1015, April.
    15. Young Bong Chang & Vijay Gurbaxani, 2013. "An Empirical Analysis of Technical Efficiency: The Role of IT Intensity and Competition," Information Systems Research, INFORMS, vol. 24(3), pages 561-578, September.
    16. Basant, Rakesh & Commander, Simon & Harrison, Rupert & Menezes-Filho, Naercio, 2006. "ICT Adoption and Productivity in Developing Countries: New Firm Level Evidence from Brazil and India," IZA Discussion Papers 2294, Institute of Labor Economics (IZA).
    17. Todorova, Tamara, 2010. "Vertical Integration in High-Transaction Cost Sectors: The Case of the Bulgarian Pharmaceutical Industry," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 1(2 (Winter), pages 127-138.
    18. Fueki, Takuji & Kawamoto, Takuji, 2009. "Does information technology raise Japan's productivity?," Japan and the World Economy, Elsevier, vol. 21(4), pages 325-336, December.
    19. Llopis, Maria Teresa Sanchis, 2016. "Did electricity drive Spain’s “most progressive decade”?," CAGE Online Working Paper Series 309, Competitive Advantage in the Global Economy (CAGE).
    20. Ariel Herbert FAMBEU, 2016. "Déterminants De L’Adoption Des Tic Dans Un Pays En Développement : Une Analyse Économétrique Sur Les Entreprises Industrielles Au Cameroun," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 43, pages 159-186.

    More about this item

    Keywords

    demand uncertainty; information processing; firm; information rent;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:13506. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.