Information System Choice and the Timing of Information Acquisition

In the literature, the acquisition of private information is usually common knowledge. In an adverse selection model two control problems are examined: (1) the principal (owner) may contract on the agent’s (manager’s) choice of the probability of early information obtained before production (Investment S), and (2) the owner may observe when the manager becomes informed (before or after the manager’s production choice) making the acquisition of private information common knowledge (Investment I). Control investments eliminating these problems are examined individually and jointly. The manager’s production cost information provides no decision-facilitating role as full production is always efficient. Thus, early information provides only control effects. The two investments may sound like substitutes but are, rather, complements. Investment S has no benefit but curing owner ignorance about the timing of information acquisition does. Together, an even greater owner benefit is achieved. The owner will choose {I,S} in the absence of direct investment transaction costs. With transaction costs, the equilibrium investment strategy could be {I,S}, {I} or no investment. The owner’s greatest benefit requires the manager has a probability choice alternative of one (1) for early information. However, the manager and productive efficiency are best off with a guarantee of late information. Individual investment may be undesirable even though joint investment is desired, showing the importance of viewing the control investments as a complementary system. For certain parameters the owner chooses Investment I, and induces the lowest probability of early information. This also helps the manager and efficiency compared to inducing any greater probability of early information