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A Theory of Information Flows

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  • Doh-Shin Jeon
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    Abstract

    Obtaining information about changes in market conditions is vital for the survival of the firms operating in a changing environment. In this paper, we offer a theory of information flows in a setting in which the principal faces a project choice and needs to induce the agent, who is responsible for production, to acquire and transmit a signal to improve the matching between the project and the environment. Distortions in information flows arise since the production cost is known only to the agent and therefore he may protect his information rent by withholding the signal. The optimal incentive scheme exhibits countervailing incentives which create a trade-off between the amount of transmitted information and rent extraction. Our theory offers a rationale for the separation of day-to-day operating decisions from long-term strategic decisions stressed by Williamson.

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    Bibliographic Info

    Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 77.

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    Date of creation: Nov 2003
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    Handle: RePEc:bge:wpaper:77

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    Related research

    Keywords: information flows; countervailing incentives; multitasking; asymmetric information;

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    1. Severin Borenstein & Joseph Farrell, 1999. "Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry," NBER Working Papers 7075, National Bureau of Economic Research, Inc.
    2. Laffont, Jean-Jacques & Martimort, David, 1994. "Separation of Regulators against Collusive Behavior," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 44, Institut d'Économie Industrielle (IDEI), Toulouse.
    3. Gromb, Denis & Martimort, David, 2004. "The Organization of Delegated Expertise," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4572, C.E.P.R. Discussion Papers.
    4. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 67, Institut d'Économie Industrielle (IDEI), Toulouse.
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