IDEAS home Printed from
   My bibliography  Save this article

Organization and Information: Firms' Governance Choices in Rational-Expectations Equilibrium


  • Robert Gibbons
  • Richard Holden
  • Michael Powell


We analyze a rational-expectations model of price formation in an intermediate-good market under uncertainty. There is a continuum of firms, each consisting of a party who can reduce production cost and a party who can discover information about demand. Both parties can make specific investments at private cost, and there is a machine that either party can control. As in incomplete-contracting models, different governance structures (i.e., different allocations of control of the machine) create different incentives for the parties' investments. As in rational-expectations models, some parties may invest in acquiring information, which is then incorporated into the market-clearing price of the intermediate good by these parties' production decisions. The informativeness of the price mechanism affects the returns to specific investments and hence the optimal governance structure for individual firms; meanwhile, the governance choices by individual firms affect the informativeness of the price mechanism. In equilibrium, the informativeness of the price mechanism can induce ex ante homogeneous firms to choose heterogeneous governance structures. Copyright 2012, Oxford University Press.

Suggested Citation

  • Robert Gibbons & Richard Holden & Michael Powell, 2012. "Organization and Information: Firms' Governance Choices in Rational-Expectations Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 127(4), pages 1813-1841.
  • Handle: RePEc:oup:qjecon:v:127:y:2012:i:4:p:1813-1841

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. David Ettinger & Philippe Jehiel, 2010. "A Theory of Deception," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 1-20, February.
    2. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    3. repec:wsi:wschap:9789812818478_0007 is not listed on IDEAS
    4. Martin W. Cripps & George J. Mailath & Larry Samuelson, 2004. "Imperfect Monitoring and Impermanent Reputations," Econometrica, Econometric Society, vol. 72(2), pages 407-432, March.
    5. Liu, Qingmin & Skrzypacz, Andrzej, 2009. "Limited Records and Reputation," Research Papers 2030, Stanford University, Graduate School of Business.
    6. George J. Mailath & Larry Samuelson, 2001. "Who Wants a Good Reputation?," Review of Economic Studies, Oxford University Press, vol. 68(2), pages 415-441.
    7. repec:dau:papers:123456789/5434 is not listed on IDEAS
    8. Cripps, Martin W. & Mailath, George J. & Samuelson, Larry, 2007. "Disappearing private reputations in long-run relationships," Journal of Economic Theory, Elsevier, vol. 134(1), pages 287-316, May.
    9. Drew Fudenberg & David K. Levine, 2008. "Reputation And Equilibrium Selection In Games With A Patient Player," World Scientific Book Chapters,in: A Long-Run Collaboration On Long-Run Games, chapter 7, pages 123-142 World Scientific Publishing Co. Pte. Ltd..
    10. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796, June.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Elchanan Ben-Porath & Eddie Dekel & Barton L. Lipman, 2013. "A Price Theory of Vertical and Lateral Integration," Boston University - Department of Economics - Working Papers Series 2013-004, Boston University - Department of Economics.
    2. Patrick Legros & Andrew F. Newman, 2014. "Contracts, Ownership, and Industrial Organization: Past and Future," Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 82-117.
    3. Andrew F. Newman & Patrick Legros, 2011. "Incomplete Contracts and Industrial Organization: A Survey," Boston University - Department of Economics - Working Papers Series WP2011-036, Boston University - Department of Economics.
    4. Serfes, Konstantinos, 2013. "A Price Theory of Vertical and Lateral Integration under Two-Sided Productivity Heterogeneity," School of Economics Working Paper Series 2013-6, LeBow College of Business, Drexel University, revised 06 Mar 2014.
    5. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216, June.
    6. Legros, Patrick & Newman, Andrew, 2012. "A Price Theory of Vertical and Lateral Integration (Revised Version)," CEPR Discussion Papers 9004, C.E.P.R. Discussion Papers.
    7. Bryan Hong & Lorenz Kueng & Mu-Jeung Yang, 2015. "Estimating Management Practice Complementarity between Decentralization and Performance Pay," NBER Working Papers 20845, National Bureau of Economic Research, Inc.
    8. Albert H. Choi, . "Non-Profit Status and Relational Sanctions: Commitment to Quality through Repeat Interactions and Organizational Choice," Journal of Law and Economics, University of Chicago Press, vol. 58(4).
    9. Guido Maretto, 2017. "Diversification and Screening," FEUNL Working Paper Series wp610, Universidade Nova de Lisboa, Faculdade de Economia.
    10. Guido Maretto, 2011. "Contracts and Market: Risk Sharing with Hidden Types," Working Papers ECARES ECARES 2011-005, ULB -- Universite Libre de Bruxelles.
    11. Bayo-Moriones, Alberto & Galdon-Sanchez, Jose Enrique & Gil, Ricard, 2013. "'Make-or-Buy' of Peripheral Services in Manufacturing: Evidence from Spanish Plant-Level Data," IZA Discussion Papers 7138, Institute for the Study of Labor (IZA).

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:qjecon:v:127:y:2012:i:4:p:1813-1841. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.