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Observability and Endogenous Organizations

Author

Listed:
  • 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.

Suggested Citation

  • Weerachart T. Kilenthong & Gabriel A. Madeira, 2010. "Observability and Endogenous Organizations," Working Papers 05-2010, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    • Handle: RePEc:fea:wpaper:05-2010
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    References listed on IDEAS

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    Cited by:

    1. Weerachart T. Kilenthong & Gabriel A. Madeira, 2017. "Observability and endogenous organizations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(3), pages 587-619, March.
    2. Weerachart T. Kilenthong & Gabriel A. Madeira, 2017. "Observability and endogenous organizations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(3), pages 587-619, March.
    3. Weerachart Kilenthong, 2015. "Observability and Endogenous Organizations," PIER Discussion Papers 13, Puey Ungphakorn Institute for Economic Research.

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    More about this item

    Keywords

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