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Title: Relative Importance, Specific Investment and Ownership in Interorganizational Systems
Authors: Nault, Barrie R
Han, Kunsoo
Kauffman, Robert J.
Keywords: Economic Theory;Incomplete contracts;Interorganizational information systems;Investment specificity;Information systems;IT investments;Ownership;Property rights;Relative importance;Supply chain managment
Issue Date: Sep-2008
Publisher: Springer
Citation: Han, K., Kauffman, R.J., and Nault, B.R., "Relative Importance, Specific Investment and Ownership in Interorganizational Systems", Information Technology and Management, 9, 3 (September 2008), 181-200.
Abstract: Implementation and maintenance of interorganizational systems (IOS) require investments by all the participating firms. Compared with intraorganizational sys- tems, however, there are additional uncertainties and risks. This is because the benefits of IOS investment depend not only on a firm’s own decisions, but also on those of its business partners. Without appropriate levels of investment by all the firms participating in an IOS, they cannot reap the full benefits. Drawing upon the literature in institutional economics, we examine IOS ownership as a means to induce value-maximizing noncontractible investments. We model the impact of two factors derived from the theory of incomplete contracts and transaction cost economics: relative importance of investments and specificity of investments. We apply the model to a vendor-managed inventory system (VMI) in a supply chain setting. We show that when the specificity of investments is high, this is a more critical determinant of optimal ownership structure than the relative importance of investments. As technologies used in IOS become increasingly redeployable and reusable, and less specific, the relative importance of investments becomes a dominant factor. We also show that the bargaining mechanism—or the agreed upon approach to splitting the incremental payoffs—that is used affects the relationship between these factors in determining the optimal ownership structure of an IOS.
Description: Author's post-print on any open access repository after 12 months after publication. Must link to publisher version
Appears in Collections:Nault, Barrie R

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