Study on ERP II Decisions under Asymmetric Information: an Agency Approach

Transcription

1 Study on R II Decisions under symmetric Information: an gency pproach Wang Lina School of conomics Management, Liaoning University of Technology, Jinzhou, 00, Liaoning rovince, Rhina; Room 33,HSL Research enter of HU, Stormstraat, 000 russels, elgium Lina9763@6com bstract-in this paper, the optimization investment policy decision of an R II implementation has been analyzed under different information conditions R II implementing options decision-optimizing models were established In these models, both clients and vendors try to pursue their own benefits ased upon the principal-agent theory, the models show how a principal can force an agent to pursue his benefits Finally, a simulation experiment regarding R II implementing options was made The analysis result of R II implementing options is verified Index Terms -R II implementing problems; symmetry information; Implementing control cost; valuation level; rincipal-agent; Solution I INTRODUTION There are large similarities between the way of handling R II implementation options and financial options, as will be demonstrated in this paper Hence, extending financial options theory models can help us deal with R II investment decisions [] The main idea is that vendors can buy R II implementation options that are offered by clients That is, he can buy the right to implement lients can invest in the vendors projects, and offer permission to implement This allows the vendor to generate benefits in return for his investment However, vendors may choose not to buy the rights, but this will lead to the risk of being forced to stop his R II project with because he has no effective implementing control ecause the cost of having to stop the project is must bigger than the cost of buying clients R II implementation rights, a vendor commonly will choose buying R II implementation rights The dilemma of an R II (or R, this is more common) implementation is a bottleneck problem of disturbing industries operation, esp of supply chain (S) integration benefits [] client, core enterprise or other member enterprise in the S adopts various measures to control the effect of an R II implementation and to make sure he gets a sufficient part of the gains ut, when serious asymmetry exists between the client and the R II vendor, an R II implementation becomes very difficult oen Milis and Stephan oelmans Room 33,HSL Research enter of HU, Stormstraat, 000 russels, elgium oenmilis@hubrusselbe Stephan poelmans@hubrusselbe s principal, clients may have different characteristics; resulting in various requirements t same time, the agent s (vendor) capabilities of implementing and maintaining clientspecific R II projects may be relatively low because he doesn t have all the information on the R II s real implementing effect on the client s operation processes On the other hand, a vendor may only care about his standard R II implementation project, though this may not be suitable for the client s business So, there is a possible trade-off between standardization and the capability to fulfill the needs of the clients Moreover, clients do not necessarily have a big inside into the impact of an R II implementation since they might not be acquainted with the possibilities and limitations of an R II system Often, they are not familiar with technological problems when facing an R II implementation, while the vendors are often not acquainted with the processes and operations of the enterprise or its supply chain There is asymmetric information between client and agent In addition, according to asymmetry information theory, the vendors private information on R II implementations is regarded as external, and thus can t be controlled This is just regarded as a coincident to the hidden information concept, under the condition that the two players all can realize information asymmetry This is inevitably reflected in their implementing controlling actions In an environment of hiddeninformation, the major problem is, in the process of arranging options contract that the vendors contract choices may conflict with what clients expect, and adverse choosing is formed Under the condition of hidden-action, vendors also may start from his own benefit, and do some actions which damage the clients benefit-then, moral risk is formed In the paper, R II implementing options decisionoptimizing models were established With clients as principal, vendors as agent, R II implementation evaluation and bad quality prevention principal-agent models were set up In these models, both clients and vendors try to pursue their own benefits ased upon the principal-agent theory, the models show how a principal can force an agent to pursue his benefits

2 II R II IMLMNTIN-OTIONS-DISION S RINIL NT MODL s a principal, the clients R II implementing benefit function, say, principal s target function is W X Z () Here, Z is the client-controlled implementation benefit is the vendors option payment which is asked by clients, that is, clients revenue -it is a decision variable, and is the function of the vendors implementation-evaluation level, is the clients cost to prevent bad implementation quality, and is a function of, is the bad quality implementation prevention level of clients, it describes implementation-controlling probability, so, it is a decision variable which is ascertained by clients and having subject active affection, 0,, is the implementation-evaluation level of the vendors, it describes the probability of vendor-controlled implementation that excesses standard It is a decision variable which is ascertained by the clients and that has subject active affection, 0, W, X are certain constants that are negotiated by clients and vendors IR Hence, clients individual rational constraint ( ) is Here, is the clients highest implementingcontrolling level It is her rational constraint of implementingprevent ability For the convenience of dealing with problems, according to literature [], change IR to condition of twotimes model function, is Z a () Here, a is parameter of vendors greatest implementingevaluation ability, and a 0 endors implementing-controlling benefit function, that is, agent s target function is Z 3 U W X (3) Z3 Here, is vendor s implementing-controlling benefit is vendors benefit when his implementing-releasing absolutely coincident to the standard is the benefit that vendors have potential situations of not coincident to standard, but he hasn t checked it out U is prize which is given by clients when vendors have checked out the default is vendor implementation-evaluation cost, it is a function of, In the problem of an R II implementing decision, clients must consider their benefit So, Z4 bz3 (here, b is probability coefficient, 0 b ) Hence, according to (), () and (3), clients benefit is Z Z Z Z3 (4) III R II IMLMNTIN-RNTIN ND OTIONS YMNT DISIONS R II implementation-preventing and Options ayment Decisions under Symmetry Information Under condition of symmetric information between clients and vendors, clients absolutely can observe vendors implementation-evaluation activities Their R II implementation decision problem is an optimizing problem lients target is to choose appropriate implementationpreventing level and options payment, and maximize implementation-controlling benefits, that is max Z Z,, (5) t the same time, under principal-agent theory, as a principal, clients have rights to make the vendors benefit zero, say, Z 3 0, then U W X Take (6) into (4), and seek one time derivative of and make it zero, through arranging, we get W X a (7) (6), d Z 0 a Second derivative of (4) is d, (5) shows the maximum endors implementation-evaluation and options payment decision are (8) (9) R II Implementing-reventing and Options ayment Decisions under symmetry Information Now, consider the situation were vendors have R II implementation knowledge (private information), and clients can t observe this The R II implementing decision problem becomes an asymmetric information problem, which is a typical principal-agent problem [3] In the condition of agent-vendors R II implementing evaluation information hidden, clients target function can be deszcribed as shown in formula 0 The

3 lients will choose certain implementing-prevention level and options payment to make target function (4) maximumunder condition of expectation, that is Here, max, Z H Z Z f d L (0) is the clients target benefit function under asymmetric information H L, probability distribution with probability density f, and obeys nd now, clients can estimate the vendor s implementingevaluation level, say, to clients, vendors implementingevaluation level is an estimated value ˆ This will ask clients to design a stimulus plan to proclaim ˆ that is close to the real implementing-evaluation level, and guides vendors to get certain target t the same time, clients can also realize his target [4,5] ccording to the proclaim axiom of principal-agent theory [6, 7], there is d H d d H b f d (6) W X a b U W X f From (6), get b F (8) (7) Here, F is probability distribution function of implementing-evaluation parameter Unite (5), (7) and (8), get clients implementingprevention decision solution under asymmetric information is a, b,, f, F (9) So, the solution of the options payment is d d U W X d d I NLYSS OF DISION RSULTS ˆ Z ˆ ˆ ˆ U W ˆ X ˆ onsider the clients implementing-prevention cost arg max 3 arg max ˆ ˆ () function to implementing-prevention level s first and lients model s condition () can change to a one time second degree derivatives, which are all greater than 0, and for condition, ask for a first degree derivative of ˆ and make it the convenience of dealing, choose literature [8] s prevention zero, that is d cost function Here, is the coefficient U W X u dˆ to be decided upon From (8) and (9), get () a W X d u a dˆ (0) (3) a W X U W X bf U W X Here, u is the first degree derivative of implementingprevention level a a a f () to implementing-evaluation level s ompare implementing-evaluation decision (0) under estimated value ˆ symmetric information with implementing-evaluation decision, and is an introduced controlling variable () under asymmetric information, we discovered that there is an increment, it is Hence, the R II bad implementation quality prevention U W X bf U W X problem under asymmetric information can be regard as a a f optimum control problem that has target function: benefit () expectation (0) and status () and (3) In the optimum Now, we will analyze implementing-prevention decision control problem, all implementing-evaluation level variables are results under different information conditions There all become to ecause through proclaiming an axiom and is U U Here, U stimulus strategy, the vendors implementation-evaluation level is the vendors inter loss cost and is the vendors comes closed to the real value So, in the next steps real outer loss cost Suppose that vendors inter loss implementing-evaluation level is applied implementation punishment is at-least equal to inter Using Maximum axiom to seek a solution for a classic W U loss,, and suppose that vendors outer loss controlling problem-through (0), () and (3) to establish implementing punishment is at least equal to outer Hamilton function as follows X H Zf U W X u u loss, Here consider (4) W U Here,, are joint variables of problems N (3) ontrolling equation is X H N U W X 0 (4) u Here, N is constant greater or equal to (5) Take (3), (4) into (), get Joint equations are

4 N b F X W W X a f (5) From (5), we can know, whenw X, W X 0, 0, now, That is, when vendors inter loss punishment from clients is greater than outer loss punishment, clients implementing-prevention level under asymmetric information is less than that under symmetric information When N, 0, now,, say, when vendors inter loss punishment from clients is equal to inter loss cost and his outer loss punishment equal to outer loss cost, clients implementing-prevention level under asymmetric information is equal to the results under symmetric information When W X, along X far greater N bf X than W, X W X, an f Suppose implementing-evaluation parameter 08,09, it obeys to uniform distribution f 0, get 0 0 nd still, 0 b, so, 0 0 b 0, N 0 b 0 0 b X 0, hence, N, now,, that is, when vendors inter loss punishment from clients is less than outer loss punishment, even when his outer loss punishment far exceeds the inter loss punishment, the clients implementing-prevention level under asymmetric information will not be higher than the result under symmetric information In a word, whether the vendors inter loss punishment from clients is greater or smaller than the outer loss punishment, clients implementing-prevention level decision results under asymmetric information are all lower than under symmetric information That is because, under asymmetric information, clients cannot observe vendors implementingevaluation activities, the client has to do his best to lower implementing cost-that is, implementing prevention cost-from a client s point of view This is direct result from lowering implementing prevention level When clients make implementation prevention level decisions, the overall implementation-control cost triggered includes implementation prevention and implementation punishment cost The mathematic equation is W X (6) When a 0, take (0) under symmetric information and () under asymmetric information into (6), get N bf X W W X N f (7) Here, is client implementation-control cost under asymmetric information is the client s implementationcontrol cost under symmetric information quation (7) shows, clients implementing-controlling cost under asymmetric information is higher or equal to the result under symmetric information When N 0, Say, when the vendor s inter loss punishment is equal to inter loss cost and his outer loss punishment equal to outer loss cost, clients implementation-control cost under asymmetric information is higher than the result under symmetric information This shows that, under asymmetric, as principals, the strategies of stimulating vendors, must pay implementation-control cost SIMULTION LULTIONS Here, an implementation prevention decision problem of a client to a vendor under asymmetric information is discussed The client s achieved benefit is 5000 UR, when vendor is absolutely coincident to the standard The client checked out the implementation, and vendor timely adopted implementation-control measures, the client s benefit is U 4000 UR The client achieved market benefit is 3000 UR, when the vendor has the possibility of potential excess standard The client punishes the vendor inter loss W 000 UR; the outer loss punishment of the vendor is X 4000 UR The client s highest implementing prevention level is 0 98 In addition, a 0, b 0 onsider the to vendor s implementing evaluation cost function implementing evaluation level first and second degree derivatives all greater than 0, the client s implementation prevention cost function to achieve implementation prevention level first and second degree derivatives all greater than 0, and for the convenience of dealing, choose vendor s evaluation cost function, the client s implementing prevention cost function, 4000 Suppose that vendor s implementing evaluation coefficient 08,09 and it obeys uniform distribution f 0 has the value of n n, n,,,0 The 0 decision results are as Fig and Fig Here, full line is decision results under symmetric information, whereas imaginary line is the results under asymmetric information Fig shows, the client s implementation prevention level under asymmetric information is lower than that under symmetric information Fig shows, the client s implementation-control cost under asymmetric information is higher than that under symmetric information, the asymmetric information make the client paying the price of implementingcontrolling cost

5 lient s implementing controlling cost (UR) Implementing prevention strategies (UR) Implementing evaluation level of vendors Fig Implementing prevention strategies under different information Implementing evaluation level of vendors Fig lient s implementing controlling cost under different information RFRNS [] orbett J, roote X D, supplier s optimal quantity discount policy under asymmetric information, Management Science, 000, 46(3), pp [] obett J, Tang S, Designing supply contracts: ontract type and information asymmetry, in: Tayur S, aneshan R, Michael M ed, Quantitative Models for Supply hain Management luwer cademic ublishers, pp 69-98, 000 [3] auder, ierre L, Long I, Real investment decision under adjustment costs and asymmetric information, Journal of conomic Dynamics and ontrol, 998, 3(), pp 7-95 [4] H X Yuan, Z X Tian, Material options optimum investment problem research under asymmetric information, Management Science Journal, 003, 6(6), pp 8-33 (in hinese) [5] Jim yers; Is Supply hain Management the Same as R ; roject Management; spring 00, p [6] leijnen J & aury ; Robustness in simulation: a practical methodology ; ur J opl Res, accepted for publication [7] Tsay, Nahmias S, Modeling supply chain contracts: review, in: Tayur S, aneshan R, Michael M ed, Quantitative Models for Supply hain Management, oston: luwer cademic ublishers, pp , 000 [8] Yeom S, lachandran, Ronen J, The role of transfer price for coordination and control within a firm, Review of Quantitative Finance and ccounting, 000, 4(), pp 6-9 I ONLUSIONS In the paper, option theory and the theory of asymmetric information were used to examine R II implementation decisions under symmetrical and a- symmetrical information situations R II implementation options decision-optimizing models were established R II implementation prevention and evaluation principal-agent models were set up In these models, both clients and vendors try to maximize their own benefits Under condition of asymmetric information, vendors hide there implementing evaluation information Using maximum axiom deduced the solution projects of R II implementing options optimum investing and options payment The results show, could use theories of options and asymmetric to solve R II implementing options decision 3 lso, simulation figure show, the client s implementation prevention level under asymmetric information is lower than that under symmetric information In addition, the client s implementationcontrol cost under asymmetric information is higher than that under symmetric information, the asymmetric information make the client paying the price of implementing-controlling cost