In distributed operations with positive externalities between branches, local underinvestment occurs because one branch does not account for the impact of its actions on other branches. Previous work found that an IT-enabled incentive mechanism called “ownership of customers” (OoC) reduced the problem of local underinvestment by accounting for inter-branch transactions. This report examines the impact of including investment by a central office on the set of previously developed results for local investment by branches. It shows that ownership of customers can reduce the problem of both central and local underinvestment. It also demonstrates how central investment can yield second-best levels of profitability—optimal profits given contracting problems in local investment with branches. It highlights how charging branches a unit fee to fund the needed level of central investment is consistent with that second-best solution.
['Barrie R. Nault']
Research Report: Information Technology and Investment Incentives in Distributed Operations