Efficiency and Cost Implications of Capital Allocation Mechanisms: A Contribution to the Market-versus-Hierarchy-Discussion

Abstract

The progress in modern information technology (IT) leads to changes in the organization of economic activity and enables new and innovative organizational structures. One example is the emergence of electronic markets. Electronic markets at the moment are primarily seen as a substitute for conventional markets. But there is also a tendency that electronic markets, because of sinking transaction costs, will break up – or even replace – hierarchical structures as well. This paper investigates whether the incorporation of an internal electronic market into an existing hierarchy can lead to an allocation of scarce resources which is superior to the allocation resulting from a conventional budgeting process. We compare this internal market with different simplified capital allocation mechanisms with respect to their ability to allocate scarce investment capital efficiently and with respect to the costs of these mechanisms. The analysis shows that under certain conditions internal electronic markets have significant advantages compared to conventional allocation mechanisms.

Zusammenfassung

Moderne Informations- und Kommunikationssysteme ermöglichen zunehmend neue und innovative Organisationsformen wie z.B. elektronische Märkte. Dieser Beitrag untersucht, in welcher Form sich ein interner Markt in eine bestehende Hierarchie eingliedern läßt und vergleicht die Ergebnisse und Kosten einer marktlichen Allokation knapper Investitionsmittel mit denen konventionellen Budgetierungsverfahren. Als Ergebnis läßt sich zeigen, daß ein interner Markt unter bestimmten Bedingungen deutliche Vorteile gegenüber konventionellen Verfahren haben kann.