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Communicating Vertical Hierarchies: the Adverse Selection Case

I study the rationale for information sharing in a model where two principals, which exert production externalities one on another, endogenously decide whether to exchange information about their exclusive agents. I show that one novel effect shapes communication decisions when agents are privately informed about production costs. This effect is absent under complete information and it turns out to be of first-order magnitude relative to those emerging in such benchmark. Roughly, what matters is how sharing information impacts contracting relationships within opponent organizations, and therefore its effect on equilibrium outputs. Information exchange induces strategies to be correlated via the distortions channel. Because of those distortions, the equilibrium value of communication depends on the interplay between the nature of upstream externalities and the sign of cost correlation. When upstream externalities and cost correlation have the same sign, there exists a unique symmetric equilibrium with no communication. By contrast, when upstream externalities and cost correlation have opposite signs there exists a unique symmetric equilibrium where both principals share information. I also show that, unlike in previous models, under asymmetric information principals might run into a prisoner dilemma when there is no communication at equilibrium. Information sharing is also shown to have an unambiguous negative effect on rents. Moreover, there exists a system of transfers such that the equilibrium outcome obtained when both principals share information is collusion-proof.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 273.

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Date of creation: 09 Feb 2011
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Handle: RePEc:sef:csefwp:273
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  1. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  2. Manove, M. & Padilla, A.J. & Pagano, M., 1998. "Collateral vs. Project Screening: a Model of Lazy Banks," Papers 9807, Centro de Estudios Monetarios Y Financieros-.
  3. Alberto Bennardo & Marco Pagano & Salvatore Piccolo, 2008. "Multiple-Bank Lending, Creditor Rights and Information Sharing," CSEF Working Papers 211, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 28 Jul 2010.
  4. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
  5. Elisabetta Iossa & Francesca Stroffolini, 2008. "Vertical Integration and Costly Demand Information in Regulated Network Industries," CEDI Discussion Paper Series 08-03, Centre for Economic Development and Institutions(CEDI), Brunel University.
  6. Michela Cella & Federico Etro, 2010. "Oligopolistic Screening and Two-way Distortion," Working Papers 2010_28, Department of Economics, University of Venice "Ca' Foscari".
  7. Jeanne Hagenbach & Frédéric Koessler, 2009. "Strategic communication networks," Documents de travail du Centre d'Economie de la Sorbonne 09005, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  8. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
  9. Martimort, David, 1994. "Exclusive Dealing, Common Agency and Multiprincipals Incentive Theory," IDEI Working Papers 43, Institut d'Économie Industrielle (IDEI), Toulouse, revised 1996.
  10. Gromb, Denis & Martimort, David, 2004. "The Organization of Delegated Expertise," IDEI Working Papers 284, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
  12. Giacomo Calzolari & Alessandro Pavan, 2005. "On the Optimality of Privacy in Sequential Contracting," Discussion Papers 1404, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Pagano, Marco & Jappelli, Tullio, 1993. " Information Sharing in Credit Markets," Journal of Finance, American Finance Association, vol. 48(5), pages 1693-1718, December.
  14. repec:pse:psecon:2008-10 is not listed on IDEAS
  15. Norbert Maier & Marco Ottaviani, 2009. "Information Sharing in Common Agency: When is Transparency Good?," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 162-187, 03.
  16. Bertoletti, Paolo & Poletti, Clara, 1997. "X-Inefficiency, Competition and Market Information," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 359-75, December.
  17. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
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