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Observability and Endogenous Organizations

  • Weerachart T. Kilenthong
  • Gabriel A. Madeira

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.

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File URL: ftp://cpq.fearp.usp.br:2300/textos_discussao/eco/TD-E05-2010.pdf
File Function: First version, 2010
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Paper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 05-2010.

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Date of creation: 08 Feb 2010
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Handle: RePEc:fea:wpaper:05-2010
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  1. 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.
  2. Jalan, Jyotsna & Ravallion, Martin, 1997. "Are the poor less well-insured? Evidence on vulnerability to income risk in rural China," Policy Research Working Paper Series 1863, The World Bank.
  3. Pierre-Andre Chiappori & Krislert Samphantharak & Sam Schulhofer-Wohl & Robert M. Townsend, 2013. "Heterogeneity and risk sharking in village economies," Staff Report 483, Federal Reserve Bank of Minneapolis.
  4. Garance Genicot & Debraj Ray, 2003. "Group Formation in Risk-Sharing Arrangements," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 87-113.
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  6. Ramakrishnan, Ram T S & Thakor, Anjan V, 1991. "Cooperation versus Competition in Agency," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 248-83, Fall.
  7. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  8. Edward Simpson Prescott & Robert M. Townsend, 2000. "Firms as clubs in Walrasian markets with private information," Working Paper 00-08, Federal Reserve Bank of Richmond.
  9. Robert Townsend & Rolf Mueller, 1998. "Mechanism Design and Village Economies: From Credit, to Tenancy, to Cropping Groups," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 119-172, January.
  10. Edward C Prescott & Robert M Townsend, 1997. "General Competitive Analysis in an Economy with Private Information," Levine's Working Paper Archive 1578, David K. Levine.
  11. Mueller, Rolf A.E. & Prescott, Edward S. & Sumner, Daniel A., 2002. "Hired hooves: Transactions in a south Indian village factor market," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 46(2), June.
  12. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-91, May.
  13. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
  14. Ray, Debraj, 2007. "A Game-Theoretic Perspective on Coalition Formation," OUP Catalogue, Oxford University Press, number 9780199207954, December.
  15. Meghir, Costas, 1992. " Household Saving in LDCs: Credit Markets, Insurance and Welfare: Comment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 275-79.
  16. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Working Papers 791, Economic Growth Center, Yale University.
  17. Gadi Barlevy & Derek Neal, 2009. "Pay for percentile," Working Paper Series WP-09-09, Federal Reserve Bank of Chicago.
  18. Christian Ahlin & Robert Townsend, 2003. "Selection into and across Credit Contracts: Theory and Field Research," Vanderbilt University Department of Economics Working Papers 0323, Vanderbilt University Department of Economics.
  19. Fafchamps, Marcel & Gubert, Flore, 2007. "The formation of risk sharing networks," Journal of Development Economics, Elsevier, vol. 83(2), pages 326-350, July.
  20. Edward P. Lazear & Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," NBER Working Papers 13653, National Bureau of Economic Research, Inc.
  21. Deaton, A., 1991. "Household Saving in LDC'S: Credit Markets, Insurance, And Welfare," Papers 153, Princeton, Woodrow Wilson School - Development Studies.
  22. Deaton, A., 1992. "Saving and Income Smoothing in Cote d'Ivoire," Papers 156, Princeton, Woodrow Wilson School - Development Studies.
  23. Prescott, Edward Simpson & Townsend, Robert M., 2002. "Collective Organizations versus Relative Performance Contracts: Inequality, Risk Sharing, and Moral Hazard," Journal of Economic Theory, Elsevier, vol. 103(2), pages 282-310, April.
  24. Grimard, Franque, 1997. "Household consumption smoothing through ethnic ties: evidence from Cote d'Ivoire," Journal of Development Economics, Elsevier, vol. 53(2), pages 391-422, August.
  25. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
  26. repec:dau:papers:123456789/4392 is not listed on IDEAS
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