Integration and Information: Markets and Hierarchies Revisited
Robert S. Gibbons
Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)
University of Chicago
Michael L. Powell
Massachusetts Institute of Technology (MIT)
January 22, 2010
MIT Sloan Research Paper No. 4776-10
We analyze a rational-expectations model of price formation in an intermediate-good market under uncertainty. There is a continuum of dyads, each consisting of an upstream party and downstream party. Both parties can make specific investments at private cost, and there is a machine that either party can own. As in property rights models, different ownership structures 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 by the parties' trading behaviors. The informativeness of the price mechanism affects the returns to specific investments and hence the optimal ownership structure for individual dyads; meanwhile, the ownership choices by individual dyads affect the informativeness of the price mechanism. In equilibrium the informativeness of the price mechanism can induce ex ante homogeneous dyads to choose heterogeneous ownership structures.
Number of Pages in PDF File: 34
JEL Classification: D20, D23
Date posted: March 24, 2010
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