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Observability and Endogenous Organizations

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  • Weerachart T. Kilenthong
  • Gabriel A. Madeira

Abstract

This paper establishes a relationship between the observability of common shocks and optimal organizational design under a multiagent moral hazard environment. We show that, with sucient information about common shocks, a cooperative organization can be optimal even if outputs are highly correlated. This is consistent with the empirical observation that cooperative arrangements may be more prevalent when outputs are correlated. The model is then embedded in a Walrasian equilibrium model where choices of organization and investment on information about common shocks are determined jointly. Numerical results reveal that both cooperative and individualistic regimes can coexist in equilibrium. The interplay between organization, investment in information, and inequality is thus analyzed.

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Bibliographic Info

Paper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 05-2010.

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Date of creation: 08 Feb 2010
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Handle: RePEc:fea:wpaper:05-2010

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Related research

Keywords: Risk sharing; general equilibrium; mechanism design; relative performance; optimal organization; aggregate uncertainty;

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References

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  1. Ramakrishnan, Ram T S & Thakor, Anjan V, 1991. "Cooperation versus Competition in Agency," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 248-83, Fall.
  2. Deaton, A., 1991. "Household Saving in LDC'S: Credit Markets, Insurance, And Welfare," Papers 153, Princeton, Woodrow Wilson School - Development Studies.
  3. Ahlin, Christian & Townsend, Robert M., 2007. "Selection into and across credit contracts: Theory and field research," Journal of Econometrics, Elsevier, vol. 136(2), pages 665-698, February.
  4. Grimard, Franque, 1997. "Household consumption smoothing through ethnic ties: evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 53(2), pages 391-422, August.
  5. Jalan, Jyotsna & Ravallion, Martin, 1999. "Are the poor less well insured? Evidence on vulnerability to income risk in rural China," Journal of Development Economics, Elsevier, vol. 58(1), pages 61-81, February.
  6. Pierre-Andre Chiappori & Krislert Samphantharak & Sam Schulhofer-Wohl & Robert Townsend, 2013. "Heterogeneity and risk sharking in village economies," Staff Report 483, Federal Reserve Bank of Minneapolis.
  7. Madeira, Gabriel A. & Townsend, Robert M., 2008. "Endogenous groups and dynamic selection in mechanism design," Journal of Economic Theory, Elsevier, vol. 142(1), pages 259-293, September.
  8. Edward S. Prescott & Robert M. Townsend, 2000. "Firms as clubs in Walrasian markets with private information," Working Paper 00-08, Federal Reserve Bank of Richmond.
  9. Gubert, Flore & Fafchamps, Marcel, 2007. "The Formation of Risk Sharing Networks," Economics Papers from University Paris Dauphine 123456789/4392, Paris Dauphine University.
  10. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
  11. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
  12. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
  13. Meghir, Costas, 1992. " Household Saving in LDCs: Credit Markets, Insurance and Welfare: Comment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 275-79.
  14. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May.
  15. Robert Townsend & Rolf Mueller, 1998. "Mechanism Design and Village Economies: From Credit, to Tenancy, to Cropping Groups," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 119-172, January.
  16. Prescott, Edward Simpson & Townsend, Robert M., 2002. "Collective Organizations versus Relative Performance Contracts: Inequality, Risk Sharing, and Moral Hazard," Journal of Economic Theory, Elsevier, vol. 103(2), pages 282-310, April.
  17. Mueller, Rolf A.E. & Prescott, Edward S. & Sumner, Daniel A., 2002. "Hired hooves: Transactions in a south Indian village factor market," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 46(2), June.
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