Organization and Information: FirmsGovernance Choices in Rational-Expectations Equilibrium

We analyze a rational-expectations model of price formation in an intermediategood market under uncertainty. There is a continuum of …rms, each consisting of a party who can reduce production cost and a party who can discover information about demand. Both parties can make speci…c investments at private cost, and there is a machine that either party can control. As in incomplete-contracting models, di¤erent governance structures (i.e., di¤erent allocations of control of the machine) create di¤erent 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 a¤ects the returns to speci…c investments and hence the optimal governance structure for individual …rms; meanwhile, the governance choices by individual …rms a¤ect the informativeness of the price mechanism. In equilibrium, the informativeness of the price mechanism can induce ex ante homogeneous …rms to choose heterogeneous governance structures. (JEL: D20, D23). Gibbons: Massachusetts Institute of Technology, [email protected]. Holden: University of New South Wales, [email protected]. Powell: Massachusetts Institute of Technology, [email protected]. We thank Daron Acemoglu, Philippe Aghion, Mathias Dewatripont, Glenn Ellison, Oliver Hart, Bengt Holmstrom, Matt Selove, Sarah Venables, Birger Wernerfelt, Oliver Williamson, the editors, three anonymous referees, and seminar participants at Chicago, Columbia, Harvard, MIT, MBS, Munich, Northwestern, Penn, Queen’s, Sydney, Toronto, ULB, UNSW and USC for helpful comments. All three authors thank MIT Sloan’s Program on Innovation in Markets and Organizations for …nancial support, Holden thanks the University of Chicago Booth School of Business for …nancial support, and Powell thanks the NSF.