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Chapter 9. Choosing the Right Organizati... > Managing Information Problems in Org...

Managing Information Problems in Organizing

You will also need to consider information problems when you choose between owning the different parts of the value chain and contracting for them. Depending on the nature of the business, the information problems from contractual modes sometimes outweigh the information problems from hierarchical modes. When this is the case, you are best off adopting hierarchical modes and adopting contractual modes when the opposite is true.

One type of information problem that makes it important to own the different parts of the value chain is the disclosure problem. As chapter 7 explained, you need to keep information about your opportunity secret to prevent other people from imitating your new product or service. One of the problems with using contracts to obtain control over manufacturing or distribution outlets is that to set up a contract with someone else to provide these things, you will to disclose your secrets to them. This need to divulge information often creates what Nobel Prize–winning economist Kenneth Arrow called the disclosure paradox. If you want to license the technology to an existing manufacturer and have that company manufacture your product for you, you need to tell the manufacturer what the new technology will do. After all, the manufacturer will not want to contract to pay you for the new technology without evidence that it has value. Unfortunately, your efforts to provide the manufacturer with evidence that your new technology has value will demonstrate to the buyer how the technology works, which lets the manufacturer know what you know. Once the manufacturer knows what you know, he or she has no reason to pay you to license your knowledge—you just gave it away for free! Hence, there is a paradox of disclosure.[8]


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