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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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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. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
  2. Fafchamps, Marcel & Gubert, Flore, 2007. "The formation of risk sharing networks," Journal of Development Economics, Elsevier, vol. 83(2), pages 326-350, July.
  3. Jalan, Jyotsna & Ravallion, Martin, 1999. "Are the poor less well insured? Evidence on vulnerability to income risk in rural China," Journal of Development Economics, Elsevier, vol. 58(1), pages 61-81, February.
  4. 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.
  5. 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.
  6. Pierre-Andre Chiappori & Krislert Samphantharak & Sam Schulhofer-Wohl, 2011. "Heterogeneity and risk sharing in village economies," Working Papers 683, Federal Reserve Bank of Minneapolis.
  7. 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.
  8. 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.
  9. Madeira, Gabriel A. & Townsend, Robert M., 2008. "Endogenous groups and dynamic selection in mechanism design," Journal of Economic Theory, Elsevier, vol. 142(1), pages 259-293, September.
  10. 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.
  11. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  12. 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.
  13. 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.
  14. 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.
  15. Deaton, A., 1991. "Household Saving in LDC'S: Credit Markets, Insurance, And Welfare," Papers 153, Princeton, Woodrow Wilson School - Development Studies.
  16. Edward Simpson Prescott & Robert M. Townsend, 2006. "Firms as Clubs in Walrasian Markets with Private Information," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 644-671, August.
  17. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
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