The role of information economics in modern world of management is non-trivial. The study of information economics help to illustrate the rationale of information and how information as an entire system determines and influences the decision made in any economic activity through the various attributes they have. This further brings forth the importance of management of information system in any business organization or production unit (Willcocks, 2013). The role of economics in information and its management is undeniably important since information have crucial influence in the economic decision making within as well as outside the market place and hence impacting market forces and stability.
The report discusses the role of economic information system in the management domain in order to analyze the impact it has on the decision taken by managerial bodies (Tayur, Ganeshan & Magazine, 2012). Management itself comes with several challenges that is explained and sorted by the essence of the economic theory provides. Just like allocation of other scarce resources to bring out maximum productivity, information is of strategic importance hence its employment allocation and management demand greater concern for business entities to ensure higher productivity (Ballwieser, 2012). Through the discussion, content has been developed in order to identify and asses impact of information on management decisions as well as tackling information with the framework of economic theories.
The discussion is presented in formal report format shedding light on the theoretical background and historical evolution along with overtime development of the economic information system content analysis of current issue and recommendations where required.
Economic information system is the study of information system as whole with proper economic theory taking care of the explanation that information play in business decision (Weber, 2012). It is the study of systems with specific reference to information stemming from and influencing theoretical discussion made in economics and how they impact the business and production activities. This economic information system supports operation of management decision making through the information and communication technology it builds upon. It also helps in analyzing the structural shifts in the economy taking place all over the modern world (Weitzel, 2012). The concept is to able to take care of the theories on society, policy framework for public discourse and statistical measurements involved in policy planning.
To analyze any situation with the economics sense, one needs to depend on relevant information carrying economic value to solve the purpose of the process. The available information is synthesized in order to make choices regarding any activity that would further bring higher payoffs or utility than expectation made (Tayur, Ganeshan & Magazine, 2012). Compared to this case, choices made and outcome derived in the absence of proper information and its management often leads to a level of production or the services that are less than optimal level and hence depict inefficiency in resource allocation.
When facts are recorded they take the form of information that further creates knowledge, the epitome of power. So even for the market power to prevail in any kind of goods or service market, information is of intriguing importance. The entire decision making in economics is done under the assumption of proper information (Drury, 2013). If a commodity is sold in different markets across regions with different price then the very information of it can only help to estimate and evaluate the average price of it (Kagel & Roth, 2016). Information regarding any goods has to be disseminated to public and advertising play big role in doing that and also creating demand in the market. Information economics often debunks the core assumption of perfect information working underneath and deviates from it toward asymmetry in information leading to information failure. It is the concern of information economics to outline the untapped features of information that can impact economic decision and choices in any sort of market. Coming to the information failure it can be said that it is one of the major reasons operating behind irrational decisions made by management bodies or individual consumers. Asymmetry in information takes place when access to information differs among people with presence of bias to no information at all (Galliers & Leidner, 2014). This impacts the consumer behavior that further inflicts the operational inefficiency. Informational failure can lead to severe problems of adverse selection and moral hazard that affect management functioning.
Information system as a whole is more than just database or recorded facts. It is set of processes that allow strategic handling of information via successful collection followed by storage, organization and communication of the information obtained. Information system acts as grouped components that produce information (Marschak, 2012). IS work as systematic bridge between raw data and meaningful information that allows the business process to use and work efficiently. Tracing the history it can be found that information evolved from being knowledge to commodity to industrial activity to finally information as technology. This evidently depicts the transformation in value of information as one of the important resources in decision making and strategy planning (Pearlson, Saunders & Galletta, 2016).
In the 1950- information system was quite simple for it only had to deal with electronic Data Processing (EDP), and Transaction processing System (TPS). Both of these mostly performed daily activities including data manipulation, summarization andtransaction. The first period 1960-1970 that recorded a shift in the information system from EDP to management of information system (MIS) that is set of pre-specified reports assisting in business decision making.
The second period 1970-1980 showed movement toward decision Support System (DSS) from MIS. DSS makes provision of ad-hoc support interactive for business decisions serving planning and management of operations.
The third period 1980 – 1990 made structural shift with introduction executive Information System (EIS) and advent of internet (Holsapple, 2013). EIS facilitated support in the decision making needs of senior level of executives with making provision of both the external and internal information base that meets the strategic targets of the organization.
The fourth period 1990-2000 these era marked significant shift in the technology of information system and environment of business. With the advent and commercialization of internet, newer modes of communication and information handling came up. Artificial intelligence, expert system, Knowledge Management System, all of this required minimalistic human intervention in basic information manipulation and workers could be utilized to contribute their knowledge and skill in more complex factors (Romney & Steinbart, 2012). Expert system is generally computer based system that emulates the ability of decision making of human and also takes their place and also providing assistance to them. KMS as system creates, organize and disseminate business knowledge within the organization. Internet access and helpdesk systems are some of the example of KMS.
The fifth period 2000 and present time saw the capabilities of information system in the business changing with the rapid expansion of internet, extranet, intranets and globalised world. Today’s business entities are being taken care of by internet or web-based enterprise or electronic business (Romney & Steinbart, 2012). IS is still performing the same task of processing transaction, keeping records, reporting and supporting management in the accounting system and organization process as well as it used to do 50 years back. The change that has taken place over time is in the connectivity across different system component backed by advancements in technology that brings forth higher integration within system, improved infrastructure in network, greater storage capacity and powerful machines (Warr & Ayres, 2012). Advent of big data, cloud and mobile computing in the era of growing wireless technology is something that added remarkable aid to the information system.
Economics has major role to play in management decisions. The application of economic concept and analysis in management is known as business economics or managerial economics. It helps in selecting business area, availability and assessment of funds to be invested, product choices, determining output and ways of promoting sales. Economic theory and information emanating from them help in analysis of risk, production, pricing and decision regarding capital budgeting in nay business. To quantify and assess risk information plays pivotal role as the asymmetric information affects business process. To manage risk decision rules needs to employ the analysis of risk. In order to determine optimum product, efficient pricing and optimum capital purchase and investment decision, economic information is crucial factor.
Economics as a whole studies the behavior of consumers, firms taking decision and further determining the resource allocation. Through effective use of all production inputs and co-ordination among labor and other inputs, economics play important role in management arena of any organization. Proper management takes care of smooth interaction and interrelatedness of different parts of an organization upholding a good environment through successful building as well as execution of models that help understand the managerial behavior and their role in the decision making process (Galliers & Leidner, 2014). Two of important issues of economic information system that affect the business management environment are the components of information failure that have rigorous impact. These are moral hazard and adverse selection.
In any kind of business transaction process often one party happens to take more risk than the other who bears the cost of risks, moral hazard appear and in such changes in the action of one might have detrimental effect on the other. Since one party makes complete decision about how much risk to adopt at the cost of the other party two have different level of exposure to risk mostly occurring due to information asymmetry. The risk taker has access to more information than the risk bearer and he bears a tendency of behaving improperly than the party with lesser information available.
Asymmetric information can disrupt the business process affecting the market participants in their subsequent roles. Difference in the information access and availability create divergence in the tendencies and behaviors of partners or participants in the business that leads to biased action in favor of the one who has more information and can manipulate that into action (Whitman & Mattord, 2013). These further impacts the choice decision of the agents leading to disequilibrium in the market as well as operative inefficiency of the resources mostly remain misallocated. This can hinder the business paralyzing management to take effective decision.
Moral hazard affects the management mostly occurring in relationship among employees. Firms being unable to observe all actions of the employees find it impossible to achieve efficiency in behavior in the workplace. Low efficiency of workers is common issue and this is known as Principal-Agent problem which brings forth further the issue of involuntary unemployment in the organization (Abdelhak, Grostick & Hanken, 2014). Similarly owners or shareholders of any firm might not be able to observe the actions of the managers that leads to careless inefficient decision making at their part affecting business. Moral hazard problems are evident when:
Solution to moral hazard problem needs to be encountered morally in order to deal with them. To enhance the management working employees- management relationship as well as the management integrity have to be made strong Adopting compact code of conducts, business ethics and application of moral ethic scan help to propel the business operation steering itself out of the deficiencies and issues. Making contracts between parties affiliated in the business process can turn out to be the best solution in such cases.
In order to deal with adverse selection issues two best tools are adoption of screening and signaling. In presence of asymmetry in information, People may signal the type they fall in which can create ground for credibility by transferring information to the other party involved hence resolving the information bias. An employer who wants to hire employees having proper skill set and experience encounters applicants who are willing to serve the role stating the ability to meet the skills. But only the applicants know how well the skills have been adopted by them or how well they can meet the needs of the role the employer is recruiting for. This is kind of asymmetric information. Now if the applicants have pursued any such degrees or skill programs that can validate their claim then that act as signaling in favor of the recruiter who finds it easy to encounter the asymmetric nature of the information (Laudon & Laudon, 2016). In such case the party having lower information can produce inducement to make the more informed party reveal the valuable information. A menu of choices is provided to them to make optimal choice that can be done only by exploiting personal information they possess. By making choice other party reveal the information. This way the asymmetric information gets balanced or removed.
Conclusion
The above discussion highlights how the management decisions and further efficient operation are influenced by the information system backed by the studies and theories of economics. Moreover information economics as branch of social science allows understanding the role information play in economic decision making. The failure of appropriate information leads to adverse choices made and moral hazard to appear that hinders the work process. Adoption of moral ethic codes, screening and signaling can help in steering the business out of the problems in order to ensure maximum operative efficiency.
References
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Galliers, R. D., & Leidner, D. E. (Eds.). (2014). Strategic information management: challenges and strategies in managing information systems. Routledge.
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