A Theory of Information Flows
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.
|Date of creation:||Nov 2003|
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- Severin Borenstein & Joseph Farrell, 2007.
"Do investors forecast fat firms? Evidence from the gold-mining industry,"
RAND Journal of Economics,
RAND Corporation, vol. 38(3), pages 626-647, 09.
- Borenstein, Severin & Farrell, Joseph, 2006. "Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry," Competition Policy Center, Working Paper Series qt4h02v1jp, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- 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.
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