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Real-Time Decentralization Information Processing and Returns to Scale

Authors: Van Zandt, Timothy
Radner, Roy
Keywords: returns to scale;real-time computation;decentralized information processing;organizations;bounded rationality
Issue Date: Aug-1999
Publisher: Stern School of Business, New York University
Series/Report no.: IS-99-03
Abstract: We use a model of real-time decentralized information processing to understand how constraints on human information processing affect the returns to scale of organizations. We identify three informational (dis)economies of scale: diversification of heterogeneous risks (positive), sharing of information and of costs (positive), and crowding out of recent information due to information processing delay (negative). Because decision rules are endogenous, delay does not inexorably lead to decreasing returns to scale. However, returns are more likely to be decreasing when computation constraints, rather than sampling costs, limit the information upon which decisions are conditioned. The results illustrate how information processing constraints together with the requirement of informational integration cause a breakdown of the replication arguments that have been used to establish nondecreasing technological returns to scale.
Appears in Collections:IOMS: Information Systems Working Papers

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