Observability and Endogenous Organizations

Weerachart T. Kilenthong
Gabriel Madeira
Publication Type: 
Working Papers
Publication Year: 
This paper establishes a relationship between the observability of common shocks and optimal organizational design in a multiagent moral hazard environment. We 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. The numerical results reveal that both cooperative and individualistic regimes can coexist in equilibrium but only cooperative organizations invest in information. The interplay among organization, investment in information, and inequality is thus analyzed.
JEL Codes: 
D23, D71, D85, O17
Industrial Organization
General Equilibrium