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Organization and Information: Firms' Governance Choices in Rational-expectations Equilibrium

Author(s)
Gibbons, Robert S.; Powell, Michael; Holden, Richard
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Abstract
We analyze a rational-expectations model of price formation in an intermediate-good market under uncertainty. There is a continuum of firms, each consisting of a party who can reduce production cost and a party who can discover information about demand. Both parties can make specific investments at private cost, and there is a machine that either party can control. As in incomplete-contracting models, different governance structures (i.e., different allocations of control of the machine) create different incentives for the parties’ investments. As in rational-expectations models, some parties may invest in acquiring information, which is then incorporated into the market-clearing price of the intermediate good by these parties’ production decisions. The informativeness of the price mechanism affects the returns to specific investments and hence the optimal governance structure for individual firms; meanwhile, the governance choices by individual firms affect the informativeness of the price mechanism. In equilibrium, the informativeness of the price mechanism can induce ex ante homogeneous firms to choose heterogeneous governance structures.
Date issued
2012-10
URI
http://hdl.handle.net/1721.1/75078
Department
Massachusetts Institute of Technology. Department of Economics; Sloan School of Management
Journal
Quarterly Journal of Economics
Publisher
Oxford University Press
Citation
Gibbons, R., R. Holden, and M. Powell. “Organization and Information: Firms’ Governance Choices in Rational-Expectations Equilibrium.” The Quarterly Journal of Economics 127.4 (2012): 1813–1841.
Version: Author's final manuscript
ISSN
0033-5533
1531-4650

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