Discussion of Information Rents and Preferences among Information Systems in a Model of Resource Allocation

Abstract

This discussion of the Antle and Fellingham paper (henceforth AF), Rents and Preferences among Information Systems in a Model of Resource Allocation, combines a description of the points raised during the conference discussion with my own elaboration and extension of those and other issues. The authors motivate their paper as an exploration of the consequences of introducing a public information system in the context of private information and resource allocation. They conclude that any change in a firm's cost system can have significant distributional consequences, and these consequences will lead to resistance by some employees, reducing the rate of adoption of new systems. More specifically, the paper focuses on how the firm's information system choice will affect the magnitude of both the firm's total surplus and the division of that surplus between the =olvvner and the manager. The analysis uses a model in which the manager privately observes the firm's actual production cost prior to the production decision. The manager is then free to quit the firm after observing the cost (limited liability). The manager's option to quit means that in order to retain him, the owner must allow the manager to have informational rent. The manager obtains this rent by overstating the actual total production cost and consuming