Organization Design and Incentives

Guo, H., Liu, Y., and B.R. Nault. Provisioning Interoperable Disaster Management Systems: Integrated, Unified, and Federated Approaches. MIS Quarterly, 45(1), March 2021, 45-82.

We analyze the choice of interoperability approach for the provision of disaster management systems (DMS) when resources are distributed across districts, and in times of disaster resources can be shared. The degree to which sharing (a spillover) can be coordinated efficiently depends on resource interoperability. In this public sector setting we model the provisioning of DMS as the choice between interoperability approaches; in decreasing order of centralization they are integrated, unified, and federated. A unique feature of our setting is that the interoperability approach is a collective decision by districts. Districts choose their own DMS resources and interoperability effort, and face different interoperability efficiency and technology misfit costs depending on the interoperability approach.

We find that any approach can be an equilibrium depending on interoperability efficiency, and that when the social optimum deviates from the equilibrium the socially optimal approach is more centralized. When subsidies and taxes are implemented, the socially optimal interoperability approach can be achieved with budget balance. When only subsidies can be used, the socially optimal approach can be achieved but only under certain interoperability efficiency and misfit cost conditions is there a net social gain. Having an initial level of interoperability causes the equilibrium interoperability approach to shift towards a less centralized one. Our results generalize to other settings characterized by interoperability concerns, collective decisions and spillovers

Liu, Y., Guo, H., and B.R, "Nault. Organization of Public Safety Networks: Spillovers, Interoperability, and Participation", Production and Operations Management, 26(4), April 2017, 704-723. PDF (last version working paper) Appendix

We analyze tradeoffs in the organization of public safety networks when network assets are distributed across districts and a district values network assets in its own and other districts. Comparing centralized, decentralized, and mixed organization forms, we capture two critical properties: interoperability among distributed technology-based network assets and the ability of districts to opt-in or opt-out of the centralized form. We model the provision of public safety networks, where network assets are chosen by each district or by a federal government, where these assets have a positive cross-district spillover that depends on interoperability, where investments in effort can be made to improve interoperability, and where districts can opt-in or opt-out of centralized provision. With the adoption of centralized, decentralized, or mixed provision as a result of districts' opt-in or opt-out choices, we identify conditions that determine when the districts deviate from the social optimum and thus regulatory intervention is beneficial to incent the socially optimal organization form. We show how the socially optimal organization form can be achieved through policy instruments such as a sharing rule for the cost of interoperability effort and direct government grants

Nault, B.R., and R.K. Tyagi, "Implementable Mechanisms to Coordinate Horizontal Alliances," Management Science, 47(6), June 2001, 787-799. PDF Erratum  PDF

Unprecedented changes in the economics of interaction, mainlyas a result of advances in information and telecommunication technologies such as the Internet, are causing a shift toward more networked forms of organizations such as horizontal alliances—that is, alliances among firms in similar businesses that have positive externalities between them. Because the success of such horizontal alliances depends cruciallyon aligning individual alliancemember incentives with those of the alliance as a whole, it is important to find coordination mechanisms that achieve this alignment and are simple-to-implement. In this paper, we examine two simple coordination mechanisms for a horizontal alliance characterized bythe following features: (i) firms in the alliance can exert effort onlyin their “local” markets to increase customer demand for the alliance; (ii) customers are mobile and a customer living in a given alliance member’s local area mayhave a need to buyfrom some other alliance member; and (iii) the coordination rules followed bythe alliance determine which firms from a large pool of potential member-firms join the alliance, and how much effort each firm joining the alliance exerts in its local market. In this horizontal alliance setup, we consider the use of two coordination mechanisms: (i) a linear transfer of fees between members if demand from one member’s local customer is served byanother member, and (ii) ownership of an equal share of the alliance profits generated from a royalty on each member’s sales. We derive conditions on the distribution of demand externalities among alliance members to determine when each coordination mechanism should be used separately, and when the mechanisms should be used together.

Nault, B.R., "Information Technology and Organizational Design: Locating Decisions and Information," Management Science, 44(10), October 1998, 1321-1335. PDF

We study the impact of information technology (IT) on the profitability of individual organization designs and on the relative profitability of different organization designs. We develop models where organization design is defined by the location of investment decision authority. We consider global and local investment when there is an information asymmetry between a central authority and decentralized nodes—decentralized nodes make better local investment decisions because of their local knowledge. We define three separate organization designs: a hierarchy where all investments are made by a central authority, a market where all investments are made by the decentralized nodes, and a mixed mode where global investments are made by a central authority and local investments are made by decentralized nodes. Because of complementarities between global and local investment, we show that there is underinvestment relative to first-best in all three organization designs. We also find that IT can be used to mitigate that underinvestment, either by bringing information to the decision maker or by redesigning the monitoring and incentive structure. We demonstrate that IT does not necessarily favor decentralized organization designs, and we show how the costs of coordination may result in the mixed mode being dominated by one or both of the alternative organization designs. Thus, collocation of investment decision rights and information that results in decisions that require coordination might not be optimal when the costs of not synchronizing global and local investment are high.

Nault, B.R., "Information Technology and Investment Incentives in Distributed Operations," in Information Systems Research, 8(2), June 1997, 196-202. PDF 

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 inter-branch transactions. The impact of including investment by a central office on the set of previously developed results for local investment by branches is examined. It is shown that ownership of customers can reduce the problem of both central and local underinvestment. It is also demonstrated how central investment can yield second-best levels of profitability - optimal profits given contracting problems in local investment with branches. Charging branches a unit fee to fund the needed level of central investment is highlighted as consistent with that second-best solution.

Nault, B.R.,"Mitigating Underinvestment Through an IT-Enabled Organization Form," Organization Science, 8(3), May-June 1997, 223-234. (Citation of Excellence: ANBAR Electronic Intelligence)  PDF

Information technology (IT) enables a new refinement of the horizontal network organization. We show that IT can be applied to a hybrid form of market and hierarchy, franchising, and demonstrate how the resulting horizontal network organization can be an improved organization form. Specifically, we use IT-enabled "ownership of customers" to refine the horizontal network organization and show how that refinement can alleviate the problem of franchise underinvestment in traditional franchising. In traditional franchising each franchise underinvests relative to investments in an integrated firm because the benefits that accrue to other franchises from its investment (horizontal externalities) are not accounted for in its investment decision. Ownership of customers is a combination of identifying individual customers with individual franchises, monitoring customer transactions across franchises, and transferring benefits between franchises based on those transactions. Because ownership of customers rewards franchises for the beneficial horizontal externalities generated by their investments, the levels of investment that are chosen by franchises may be increased, although not to the levels that would occur in an integrated firm. As long as IT costs are covered, the franchisor is always more profitable and, if necessary, the franchisor and franchisees can be jointly more profitable. Consequently, if profits can be redistributed in lump-sum form, then the franchisor and franchisees can be individually more profitable. The analysis applies to all horizontal organizations where ownership of customers is feasible and where there are sufficient transactions between units for ownership of customers to be worthwhile. 

Nault, B.R. and A.S. Dexter, "Adoption, Transfers and Incentives in a Franchise Network with Positive Externalities," Marketing Science, 13(4), Fall 1994, 412-423. PDF

Franchising arrangements that allow franchisees with exclusive territories to own their customers are studied. This permits franchisees to benefit from positive externalities in the franchise network through interfranchise transfers based on the purchases by their customers at other franchises on the network. Using the structure of a single franchisor and many franchisees, its is shown that interfranchise transfers between franchisees and incentives for franchisee investment in the expansion of their customer base are critical both to the size and to the benefits derived from the franchise network. Specifically, it is found that when individual franchisees make investments in marketing effort to increase their customer base, the franchisor's setting of the interfranchise transfer trades off the positive effects on network size with the negative effects of removing franchisee incentive for investment. This result is due to the fact that interfranchise tranfers encourage investment, use of the royalty and inter-franchise transfer directly dissipates franchisee profits, and indirectly dissipates franchisee profits through less than universal adoption, thereby causing franchisees to underinvest. As compared to traditional franchise systems, however, use of the interfranchise transfer results in franchises making greater investments than they otherwise would.