A Theory of Information Flows

UPF Economics and Business Working Paper No. 623

44 Pages Posted: 24 Oct 2002

See all articles by Doh-Shin Jeon

Doh-Shin Jeon

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: February 3, 2002

Abstract

Obtaining information about changes in market conditions is vital for the survival of the firms operating in a changing environment. In this paper, we offer a theory of information flows in a setting in which the principal faces a project choice and needs to induce the agent, who is responsible for production, to acquire and transmit a signal to improve the matching between the project and the environment. Distortions in information flows arise since the production cost is known only to the agent and therefore he may protect his rent by withholding the signal. The optimal incentive scheme exhibits countervailing incentives which create a trade-off between the amount of transmitted information and rent extraction. Our theory oers a rationale for the separation of day-to-day operating decisions from long-term strategic decisions stressed by Williamson. Finally, we apply our model to the issue of monopolist's incentive to innovate and derive implications.

Keywords: Information flows, countervailing incentives, multitasking, asymmetric information, innovations

JEL Classification: D8, L2

Suggested Citation

Jeon, Doh-Shin, A Theory of Information Flows (February 3, 2002). UPF Economics and Business Working Paper No. 623, Available at SSRN: https://ssrn.com/abstract=320769 or http://dx.doi.org/10.2139/ssrn.320769

Doh-Shin Jeon (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

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