worker’s disutility. The upshot of all attempting a free ride is that no one exerts
extra effort.
Smaller groups naturally have fewer free-riding problems than larger
groups, since it is easier to monitor effort by group members. In addition,
mutual trust that all will do their part is easier to achieve in small groups.
Despite potential problems with group compensation, the percentage of large
firms that base some compensation on group performance has grown, as has
the use of teams.^23608 Chapter 14 Asymmetric Information and Organizational Design(^23) The percentage of large firms with group-based compensation rose from 26 percent in 1987 to
53 percent in 1999. See E. P. Lazear and K. L. Shaw, “Personnel Economics: The Economist’s View
of Human Resources,” Journal of Economic Perspectives(Fall 2007): 91–114.
(^24) This account is based on research results in E. Brynjolfsson and L. M. Hitt, “Beyond Computation:
Information Technology, Organizational Transformation, and Business Performance,” Journal of
Economic Perspectives(2000): 23–48.
The emergence of low-cost information storage, retrieval, and transmission sys-
tems is changing the organization of firms in numerous ways. Research shows
that information technology (IT) investments add the most value when accom-
panied by complementary changes in the firm’s organization.^24
BOUNDARIES OF THE FIRM Traditionally, economic activities have been
undertaken within the firm because they are cheaper to do internally than
through an external market. As IT has reduced the cost of external transac-
tions, firms have transferred a portion of in-house activities to external sup-
pliers and markets. For instance, since the late 1990s, General Motors—the
paragon of the traditional vertically integrated firm—has discontinued or spun
off many of its component-manufacturing operations. (The spin-off of its Del-
phi Automotive Systems created a separate firm with $28 billion in sales.)
Today, e-procurement systems allow companies to transact cheaply and effi-
ciently with hundreds of external suppliers.
INTERNAL INFORMATION SHARING Research has found that the greatest
benefit of IT systems lies in facilitating information sharing within the firm.
The chief of a conglomerate might rightly lament, “If our firm only knew what
our firm knows.” In other words, even when a firm is rich in its “knowledge
capital,” it may suffer from information overkill, loss, or waste. By contrast, an
effective IT system allows efficient information sharing. Efficient information
sharing can benefit both centralized and decentralized decision making. As we
saw in the DHL case earlier, the efficient transmission of cost information to
local managers improved the decision making for decentralized local man-
agers. Likewise, efficient transmission of information can facilitate the move-
ment of information up to centralized decision makers. In addition, ideas can
be shared both within functional areas and between functional areas. For exam-
ple, a production manager can share innovation in one assembly line with the
Information
Technology and
Organizational
Structure
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