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Research Statement
My research examines the impacts of alternative management
information technologies on business and economic performance in a range of
business environments. Specifically,
my work contributes to five critical research areas:
(1) My work in IT value uses formal economic
models to dispel the notion that IT investments made by profit-maximizing
firms should necessarily increase measures of business value (productivity,
profits, and consumer welfare) or even move them in the same direction. This work shows that many of the
seemingly contradictory empirical findings in the IT value literature are
actually consistent with economic theory as embodied in these models. These findings will help firms to more
effectively manage their portfolio of IT investments and to better align IT
investments with strategic and economic goals.
(2) My work in software patent policy design
uses formal economic models to examine the impact of patent policy design
on strategic decisions (e.g., R&D investments, product innovation,
product imitation, patent decisions, product pricing) made by firms in the
software and e-commerce arena. This
work not only models the patent policy design that maximizes social welfare
in a range of business environments but also examines the impact of
alternative policy designs on the distribution of welfare among software
innovators, imitators, and consumers.
Building on existing economic theory, this research develops a new
approach to address the current software patent issues and will help guide
the active debate, in the visible public policy arena, over software
patents in the years ahead.
(3) My work in IT offshoring
uses organizational learning models to examine the potentially adverse
impacts of IT offshoring projects on not only
short- and long-term coordination costs, but also on long-term production
costs due to losses in accumulated production knowledge. This work formally illustrates the
conditions under which IT offshoring may benefit
firms, leading to a set of heuristics for IT managers considering the IT offshoring decision.
(4) My work in the social costs of information
privacy examines menu designs (or policy options) an insurer may offer
to applicants under alternative market conditions to maximize consumer
participation at affordable premiums in the presence of information
asymmetries in the individual health insurance market. Given the dramatic changes in genetic
privacy laws at the state and federal levels over the past decade, this
work has important strategic implications for the health insurance industry
and the ongoing social policy debates.
(5)
My work in IT
implementation risks provides a framework that characterizes the risks
threatening the successful implementation of large-scale IT projects and
uses strategic planning tools to help firms prioritize these risks and
develop specific strategic recommendations for managing them.
IT Value (1999 – present)
For two decades
empirical studies in the IT value literature have estimated the impact of
IT on many measures of business value, including firm productivity, firm
profitability, consumer surplus, and intermediate performance measures such
as product quality and output levels.
The results from this literature have been quite mixed. Thus, to develop a better understanding of
the theoretical relationship between specific IT investments and various
measures of business value, I initiated [10, 30 – see curriculum
vitae for references] a stream of IT value research that uses formal economic models to examine
the business value of various IT investments under alternative market and
cost structures. This work shows
that while IT investments may improve product quality they may not, even in
a theoretical setting, increase firm profit, firm productivity, or consumer
welfare or even move these economic performance measures in the same
direction. This contradicts the
common assumption that IT investments should improve economic
performance. In fact, this work
shows that many of the seemingly contradictory empirical findings in the IT
value literature are actually consistent with economic theory as embodied
in these models. The major findings
of this research are summarized below.
In [10, 30] we show how
a profit-maximizing monopolist can leverage investments in IT
infrastructure to design a better quality product that is offered to
consumers at a higher price.
Although this adjustment to product design unambiguously leads to an
increase in output levels and maximizes firm profits, it may do so at the
expense of productivity even when the IT investments are free to the
firm. Specifically, we find that the
directional impact of IT on productivity (defined as the ratio of revenues
to total costs) depends on the relationship between the firm’s
indirect fixed costs and the market size.
In [7] we extend this
monopoly model of quality-price choice to examine the impact of investments
in IT infrastructure on consumer surplus and on alternative measures of
productivity (i.e., the ratio of revenues to
direct production costs and the ratio of social welfare to direct
production costs). We find
that while these IT investments unambiguously increase product quality and
output levels, resulting in increases in firm profits and consumer surplus,
the investments unambiguously decrease the productivity measures and
increase total production costs.
These relationships are shown to be robust to the socially-optimal
setting in which a social planner chooses product quality and price to
maximize social welfare. In
addition, these results are shown to be robust for alternative product
categories (e.g., services offered free to customers but that provide
indirect benefits to the firm).
Finally, we develop an alternative monopoly model in which the firm
is unwilling or unable to adjust product quality but is still able to
adjust product price. Under this
alternative circumstance investments in IT infrastructure are shown to
improve all measures of business value, including profits, productivity,
and consumer welfare.
In [8, 29] we further
extend this theoretical work by developing a series of two-stage duopoly
models of quality-price competition and a series of monopoly models of
quality-price choice. We solve the
duopoly and monopoly models for four cost functions, where each function
makes a different assumption about the form of the marginal cost of
production. These models show that
together market structure, cost structure, and IT
characteristics determine the directional impacts (i.e., positive,
negative, or ambiguous) of IT investments on measures of business value. In fact, we
identify a set of theoretical conditions under which IT investments, made
by economically rational firms, will reduce firm profitability, decrease
firm productivity, or hurt consumer welfare. In addition, we
find that moving from monopoly to duopoly and moving from zero
marginal cost to marginal cost that is a function of quality increases the
number of economic measures for which the directional impacts of IT
investment are ambiguous, or depend on model parameter values.
These
findings contradict the common
assumption that IT investments should necessarily improve business
value. In fact this theoretical work
will help structure the important debate on IT value and, in turn, enable
the interpretation of past empirical findings, guide future data
collection, and provide IT managers with the appropriate interpretation of
business value metrics for IT investment decisions. My continuing work in this research area
examines the strategic implications of this stream of work [5]. In addition, it focuses on empirically
testing the propositions derived from the theoretical models [2, 16, 17, 18].
Specifically, IT application-level studies will determine whether
the relationships among IT investments, product design, and business value
described in this research stream hold in real-world settings.
Software Patent Policy Design (2001
– present)
To gain competitive advantage in an increasingly
digital economy many firms engage in costly research and development
activities to develop innovative software applications and software-based
business methods. At the same time recent advances in software
reengineering techniques have reduced the cost and time to imitate these
innovations, making it more difficult for innovators to recoup their costs
and, therefore, reducing their incentive to innovate. Increasingly, software innovators have
turned to the patent system to attain protection from cheap, quick
imitation. My research in software
patent policy design develops multi-stage models of duopoly competition to
examine the impact of policy trends on the strategic decisions (R&D
investments, product development, product imitation, patent decisions,
product pricing) made by firms in the software and e-commerce arena.
The patent design
literature in economics is fragmented and does not directly approach the
patent issue in the context of software and business processes. In addition, the academic IT literature
has remained silent about these issues, avoiding formal economic analysis
of software patent policy design. In
response, we examine the economic impact of software patents by developing
models that build on definitions, and synthesize modeling conventions,
developed in the patent design literature.
Our models, however, are not an incremental extension of any
existing model. Previous literature
commonly assumes that an innovative product has already been developed and
a patent has been awarded for the product.
The goal is then to fine-tune the policy instruments (ex-ante) to
provide the patentee with an externally specified reward for innovation at
minimum social cost. In contrast,
our model places the patent authority in its proper position as the first
mover with the firms responding to policy incentives. Therefore, we are able to examine the
impact of patent policy design on R&D investments, product development,
product imitation, patent decisions, and product pricing. We use these models to determine the
optimal patent policy design and to examine the impact of policy instruments
on the distribution of welfare among software innovators, imitators, and
consumers. The initial, major
findings of this research are presented in [4, 6, 14]
and summarized below.
§
We
characterize what we term a Patent Enforcement Region (PER), defined
as the set of policies that provide the innovator with profit incentive to
seek a patent. While, by definition,
policies set within the PER improve innovator profits we show that they may
worsen imitator profits, consumer welfare, or both and may even worsen
total social welfare.
§
While an
increase in patent width or patent length unambiguously increases R&D
spending, an increase in patent height may increase or decrease R&D
spending depending on the efficiency with which an innovator can transform
a novel idea into a commercial product.
§
The socially
optimal patent policy is to grant the innovator protection for the entire
life of the patented product and to set patent height and width such that both
the innovator and imitator produce higher quality products than they would
in the free market. This policy not
only maximizes social welfare, but also makes the innovator, imitator, and
consumers better off than in the free market.
§
However, counter
to the predictions of traditional incentive theory, we find that firms
exhibit lower R&D intensity under the socially optimal patent policy
than they do under free market competition.
§
In addition,
if patent length is set sufficiently short the socially optimal policy is
to set the maximum patent height that the innovator is willing to meet and
to maximize patent width (or provide the innovator with full protection
from imitation while the patent is in force).
The models are used to formally analyze
alternative patent policy proposals for software products and to examine
the impact of the private and public costs associated with the patent
system on the viability of software patent policy. This research topic was initiated in
Summer 2001 and leverages some of the modeling techniques from my work in
IT value. Initial results are
presented in [6]. I have an analytical
paper under review [14] which
extends the initial software patent models; initial versions of this paper
[28, 39] have been presented at conferences. I also have a forthcoming paper [4] which
examines the regulatory and strategic implications of this stream of
work. Going forward, I plan to
extend the models and to use experimental economics and empirical methods
to test the theoretical predictions of my work [19, 20, 21].
IT Offshoring (2006
– present)
Information technology (IT) offshore
outsourcing is an increasingly important strategic tool for firms as IT
skills and communication infrastructures have become cheaply available
overseas. Although such offshore
outsourcing activities have led to significant cost savings in many cases a critical concern is that as IT
work moves offshore the learning-by-doing
knowledge (or deep, experiential knowledge) that comes from designing,
coding, testing, and supporting applications and solving IT problems will
also move offshore.
This loss of learning-by-doing knowledge,
sometimes referred to as deskilling,
may lead to what we term a disruption in the firm’s knowledge supply
chain. We define a knowledge
supply chain as a sequence of related knowledge-based processes
that together produce a product or service.
For example, components of a software application development
project form a knowledge supply chain.
The components of this supply chain include not only lower-level production processes such as research, analysis, design, coding, testing, and support but also higher-level coordination (or
managerial) processes such as implementation and use of the software
application to solve business problems. The ability of project managers to
effectively coordinate and manage the lower-level activities depends
critically on a firm’s experience with performing such activities
(i.e., learning-by-doing knowledge).
However, if a firm offshores its
lower-level activities, it may lose much of this experiential knowledge
over time. For a specific firm a disruption occurs in the
knowledge supply chain when such a loss of learning-by-doing knowledge
(both technical and business) diminishes the ability of managers to
effectively coordinate and integrate the offshored
activities with the firm’s other internal activities.
Despite its importance, there is little
theoretical work in the IT literature that examines the economic risk of
knowledge loss and deskilling in the offshore context. In response to this void in the
literature my work integrates two economic theories – organizational
learning theory and transaction costs theory – to model how offshore
outsourcing of IT activities may affect a domestic firm’s knowledge
level over time and how this change in knowledge level may affect short-run and long-run
costs. Specifically, we use a learning model to evaluate the
impact of several critical parameters – including: 1) the rates of
learning and knowledge depreciation of the domestic and foreign firms, 2)
the rate of knowledge transfer from the foreign firm to the domestic firm,
and 3) the length of the offshored project
– on production and coordination costs incurred by the
domestic firm in both the short-run and the long-run. Based on the various instantiations of
the parameters, managerial implications may be developed to guide firms as
they consider the impacts of offshoring contract
provisions and investments in knowledge management (e.g., systems for
encouraging firm learning, mitigating knowledge depreciation, and
facilitating knowledge transfer from the foreign firm).
The key finding is that although short-lived offshoring projects may generate substantial cost
savings to the domestic firm, long-lived offshoring
projects may cause a disruption in the management supply chain, resulting
in substantial losses in the later stages of the project. Furthermore, firms that fail to realize
the costs associated with such a disruption soon enough in the project life
may find themselves locked into disadvantageous offshoring
agreements without any recourse.
Interestingly, offshored projects that
become unexpectedly delayed (i.e., the project life is extended) may be
particularly problematic for firms.
In this case, the domestic firm may take a wait-and-see approach, possibly delaying the backshoring decision until it becomes an economically
infeasible option. These and other
findings are presented in [1, 15, 22, 23, 24].
Social Costs of Information Privacy (1996
– present)
As technological
advances continue to improve individuals’ assessment of their
personal health risk factors, privacy legislation continues to restrict
insurers’ use of such information to design insurance policies,
leading to an adverse selection problem.
My research in the social costs of information privacy examines the
effectiveness of bundling strategies to mitigate adverse selection and
increase consumer participation in the individual health insurance
market. Prior bundling work in the
IT literature focuses on the use of bundling to maximize profits of a
monopoly seller of digital goods. In
contrast, my work examines the use of bundling to maximize consumer
participation in a regulated insurance market (where marginal profit to the
insurer is zero) in which insurers offer coverage for a large number of
medical conditions. I model
variations of this adverse selection problem as repeated Cournot games and solve them through iterative
numerical computation of the Nash equilibrium. I examine the impact of
alternative bundling strategies on the purchasing decisions made by
applicants, the premium rates charged by insurers, and the level of
consumer participation in the market.
My initial work in this area was published/presented in [9, 12, 35,
36, 37]. My
most recent findings in this area are presented in [3, 11, 33] and are summarized below.
§
Insurers may
attain universal coverage at equitable premiums using a pure bundling
strategy (i.e., offering only a comprehensive coverage policy to the
market). This result is strengthened
as: 1) the number of medical conditions covered in the comprehensive policy
increases, 2) the proportion of individuals at high risk for acquiring each
condition tends towards extreme values (i.e., 0% or 100%), 3) coverage for
catastrophic conditions is included in the comprehensive policy, and 4)
applicant risk aversion increases.
§
When
insurance applicants exhibit low levels of risk aversion a mixed bundling
strategy (i.e., offering the comprehensive policy and a selection of single
disease policies to the market simultaneously) improves consumer
participation and decreases premium rates when compared to a pure bundling
strategy. In this context market
performance is improved by increasing policy options offered to
applicants.
§
Alternatively,
when insurance applicants exhibit moderate levels of risk aversion a mixed
bundling strategy reduces consumer participation and increases premium
rates when compared to a pure bundling strategy. In this context market performance is
improved by reducing policy options offered to applicants.
§
When
insurance applicants exhibit sufficiently high levels of risk aversion the
consumer participation realized under pure bundling and mixed bundling
strategies converge toward full market participation. In this context market performance is
maximized when a comprehensive policy is included in the menu design and is
not affected by the presence of single-disease policies in the menu.
This research topic was
the foundation of my doctoral dissertation.
IT Implementation Risks (1994
– 1998)
Many reengineering
efforts fail for reasons unrelated to the technical ability of firms to
implement information systems. My
research on IT implementation risks uses
literature in organizational behavior and strategic management to develop a framework for
identifying and managing the risks associated with large-scale IT
implementation efforts. This work argues that the two principal reasons for
failure are: 1) functionality risk, the risk that the firm is unable
to understand its uncertain future strategic needs and 2) political risk,
the risk that the firm is unable to make painful and difficult changes in
response to these future strategic needs.
The framework suggests that these risks are the result of conflict
among the firm’s current strategy, its espoused degree of change, the
actually accepted and generally smaller degree of change, and the generally
larger degree of change that would be in some sense optimal. It also characterizes the ways in which
the conflicts among these may be unperceived or undiscussable
within the firm, exacerbating the risks.
Development of this framework led to a set of hypotheses that were
examined formally with a small set of representative case studies [13, 38]. This work led to five industry-funded
projects to develop strategic recommendations for reengineering efforts by
firms competing in the industries of travel, telecommunications, insurance,
financial services, and real estate.
It was the findings from the project sponsored by Prudential
Insurance that led to my initial research interest in the social cost of
information privacy (as described in the previous section).
Research Summary
My work in the five
research areas described above contributes to a range of academic
literatures and uses a diverse set of methodologies. In addition, each research area is of
critical importance to IT managers and industry regulators in today’s
rapidly changing business environment.
I am pleased that the pace of my research productivity, both in
quantity and in the diversity of outlets, has been accelerating, and I
expect that this trend will continue.
I am confident that my work thus far has laid the foundation for a
successful, long-term research agenda.
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