Economics of Information Processing in Operations Organizations

AbstractThis paper studies a fundamental management question: how does information economics affect the organization of management? We view management hierarchies as tree-like structures designed to minimize real and opportunity costs related to information processing and decision making. “Line” production activities stand at the end nodes of a hierarchy tree. Data from these bottom nodes are processed and distributed to higher level nodes that combine information from the lower nodes. The question we ask is: “how do the real and opportunity costs of information processing affect the tree”. We solve for the optimal tree which includes the links and capacity at each of the nodes. Models are formulated on two underlying premises: complexity costs arise due to processing different types of data, and queuing effects due to data arrival and processing uncertainties create delay which is an opportunity cost.

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