Need to Know? On the Design of Information Systems in Firms

Studies on organizational design typically show how the distribution of information and communication costs shape the allocation of decision rights in organizations. In this paper, we follow the opposite approach. For a given decision-making process, in which multiple parties are involved, we analyze how much information is acquired, how communication takes place, and what is communicated to whom. Our paper is a first step towards a positive theory of management information systems. We show how the strength and timing of monetary incentives, the need to persuade external parties, and the cost of more accurate information shape the design of management information systems. Our results highlight the interaction between information acquisition and communication. From a theoretical perspective, we show that by adding information acquisition to a cheap-talk model, the forward induction refinement excludes the babbling equilibrium provided another equilibrium exists.