Observability and endogenous organizations

Weerachart Kilenthong and Gabriel Madeira

Economic Theory, 2017, vol. 63, issue 3, No 1, 587-619

Abstract: Abstract This paper establishes a relationship between the observability of common shocks and optimal organizational design in a multiagent moral hazard environment. We consider two types of organizations, namely relative performance and cooperative regimes, and show that, with sufficient information regarding common shocks, a cooperative organization can be optimal even if outputs are highly correlated. The model is then embedded in a Walrasian general equilibrium model in which choices regarding organizations and investment in information on common shocks are jointly determined. Numerical results reveal that both cooperative and relative performance regimes can coexist in equilibrium but only cooperative organizations invest in full observability of common shocks. Changes in the cost of information and aggregate wealth can affect substantially the types of organizations operating and the matching patterns of heterogeneous agents in these organizations. General equilibrium effects are key in determining how information costs impact the way production is organized.

Keywords: Organizational design; Observability; Relative performance regime; Group regime; General equilibrium; Value of information (search for similar items in EconPapers)
JEL-codes: D23 D71 D85 O17 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Observability and Endogenous Organizations (2015)
Working Paper: Observability and Endogenous Organizations (2010)
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DOI: 10.1007/s00199-016-0959-2

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