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A Theory of Information Flows

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  • Doh-Shin Jeon

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.

Suggested Citation

  • Doh-Shin Jeon, 2003. "A Theory of Information Flows," Working Papers 77, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:77
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    File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/77.pdf
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    References listed on IDEAS

    as
    1. Farrell, Joseph & Saloner, Garth, 1986. "Installed Base and Compatibility: Innovation, Product Preannouncements, and Predation," American Economic Review, American Economic Association, vol. 76(5), pages 940-955, December.
    2. 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, September.
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    More about this item

    Keywords

    information flows; countervailing incentives; multitasking; Asymmetric Information;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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