A Model of IT-Enabled Decentralized Information Production and the Extended Organizational Form: The Boundaries of the Knowledge-Intensive Firm Revisited* (Research Seminar, April 29th, 2004) Ravi Aron University of Pennsylvania Abstract Business Process Outsourcing (BPO) has been a trend that has received considerable attention from the business and trade press. Processes and tasks which were principally executed within the boundaries of the firm, are increasingly being outsourced to off-shore low-wage labor markets. Hybrid governance structures that combine elements of markets and hierarchies are beginning to emerge. We present an analytical model of a hybrid governance structure that we term as "The Extended Organizational Form" and preliminary data from an survey of several BPO contracts in several labor regimes (including the US, UK, Singapore, Mauritius and India). We formulate an analytical model of an incomplete contract between two firms as a three stage game. The user firm outsources processes to a supplier firm which chooses an effort level resulting in a quality of output that is private information to the supplier. The user firm's level of investment in monitoring mechanisms is driven by the trade-off between the costs of monitoring and production on the one hand and the loss of revenue on the other. We derive the subgame perfect equilibrium and characterize the conditions under which the welfare level at equilibrium converges to that under the welfare maximizing solution. We also provide a welfare ranking of currently functional governance mechanisms. Finally, we present data from our ongoing survey and show that the empirical findings are broadly in consonance with the predictions of the analytical model. *Joint work with Ying Liu, University of Pennsylvania