Dissolving firm boundaries through surveillance: Incomplete contracts, information assets, and process integration

This paper addresses the issue of interorganizational governance and process integration. Specifically, we are concerned with IOSs characterized by shared processes, joint control, yet divergent incentive structures. The analysis is inspired by the Grossman, Hart, and Moore theory of incomplete contracting, which forms a framework of vertical and lateral integration based upon residual rights of control over physical assets. In this study, we explore the application of a derivative of this framework, which allows for the separation of physical and information-based assets. As a consequence of this separation, we demonstrate how the acquisition of information can shift the locus of decisions in integrated processes as well as affect pricing and the distribution of rents within a value chain. The empirical setting is a high-tech manufacturer that implemented a Lotus Notes application which tracks the flow of products across several legal entities within its sales channel. We conduct a simple regression analysis for transactions with one distributor, where we find significance in the price differential for products traded within vs. outside of the system, demonstrating a shift in the distribution of rents via information appropriation. We conclude with a discussion of how a managerial perspective would benefit from viewing supply and value chains that span organizations as single systems, not merely competing agents, and suggest how an incomplete contracts perspective is beneficial to this challenge.