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Observability and Endogenous Organizations

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  • Weerachart Kilenthong

Abstract

This paper establishes a relationship between the observability of common shocks and optimal organizational design in a multiagent moral hazard environment. We consider two types of organizations, namely relative-performace and cooperative regimes, and show that, with sufficient information regarding common shocks, a cooperative organization can be optimal even if outputs are highly correlated. The model is then embedded in a Walrasian general equilibrium model in which choices regarding organizations and investment in information on common shocks are jointly determined. Numerical results reveal that both cooperative and relative-performance regimes can coexist in equilibrium but only cooperative organizations invest in full observability of common shocks. Changes in the cost of information and aggregate wealth can affect substantially the types of organizations operating and the matching patterns of heterogeneous agents in these organizations. General equilibrium effects are key in determining how information costs impact the way production is organized.

Suggested Citation

  • Weerachart Kilenthong, 2015. "Observability and Endogenous Organizations," PIER Discussion Papers 13, Puey Ungphakorn Institute for Economic Research.
    • Handle: RePEc:pui:dpaper:13
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    More about this item

    Keywords

    Organizational design; observability; relative performance regime; group regime; general equilibrium; value of information;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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