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Firms as clubs in Walrasian markets with private information

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Author Info
Edward S. Prescott
Robert M. Townsend

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Abstract

Using private information and club theories, this paper develops a theory of firms in general equilibrium. Firms are defined to be assignments of technologies and agents to clubs. In equilibrium, firms form endogenously and multiple types may co-exist. We formulate the general equilibrium problem as both a Pareto program and as a competitive equilibrium. Welfare and existence theorems are provided. In the competitive equilibrium, club memberships are priced and purchased, so the market determines which organizations exist as well as who is a member. Pareto optima and competitive equilibria of several examples are computed. In our examples, elements of limited commitment and monitoring capabilities are important factors that affect both the internal organization of firms and their equilibrium distribution. Furthermore, equilibrium organizational structure varies with the aggregate endowment of capital and the distribution of wealth.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 00-08.

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Date of creation: 2000
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Handle: RePEc:fip:fedrwp:00-08

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Keywords: Theory of the firm ; Equilibrium (Economics);

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Demski, Joel S. & Sappington, David, 1984. "Optimal incentive contracts with multiple agents," Journal of Economic Theory, Elsevier, vol. 33(1), pages 152-171, June. [Downloadable!] (restricted)
  2. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August. [Downloadable!] (restricted)
  3. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, vol. 49(1), pages 33-64, January. [Downloadable!] (restricted)
  4. Cole, Harold Linh, 1989. "General Competitive Analysis in an Economy with Private Information: Comment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 249-52, February. [Downloadable!] (restricted)
  5. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999. "Clubs and the Market," Econometrica, Econometric Society, vol. 67(5), pages 1185-1218, September.
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  6. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics. [Downloadable!]
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  7. Tjalling C. Koopmans & Martin J. Beckmann, 1955. "Assignment Problems and the Location of Economic Activities," Cowles Foundation Discussion Papers 4, Cowles Foundation, Yale University. [Downloadable!]
  8. Patrick Legros & Andrew F. Newman, 1992. "Wealth Effects," Discussion Papers 1024, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  9. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February. [Downloadable!] (restricted)
  10. Andreas Hornstein & Edward C. Prescott, 1989. "The firm and the plant in general equilibrium theory," Staff Report 126, Federal Reserve Bank of Minneapolis. [Downloadable!]
  11. Cole, Harold L. & Prescott, Edward C., 1997. "Valuation Equilibrium with Clubs," Journal of Economic Theory, Elsevier, vol. 74(1), pages 19-39, May. [Downloadable!] (restricted)
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  12. Ramakrishnan, Ram T S & Thakor, Anjan V, 1991. "Cooperation versus Competition in Agency," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 248-83, Fall.
  13. Tirole, Jean, 1991. "Collusion and the Theory of Organizations," IDEI Working Papers 9, Institut d'Économie Industrielle (IDEI), Toulouse.
  14. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  15. Prescott, Edward Simpson, 2004. "Computing solutions to moral-hazard programs using the Dantzig-Wolfe decomposition algorithm," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 777-800, January. [Downloadable!] (restricted)
  16. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn. [Downloadable!] (restricted)
  17. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April. [Downloadable!] (restricted)
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  18. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June. [Downloadable!] (restricted)
  19. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January. [Downloadable!] (restricted)
  20. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring. [Downloadable!] (restricted)
  21. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 433-46, July. [Downloadable!] (restricted)
  22. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
  23. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alexander Karaivanov, 2002. "Computing Moral Hazard Programs With Lotteries Using Matlab," Computational Economics 0201001, EconWPA. [Downloadable!]
  2. Frank Milne & David Kelsey, 2005. "Externalities, Monopoly and the Objective Function of the Firm," Working Papers 1078, Queen's University, Department of Economics. [Downloadable!]
    Other versions:
  3. Robert M. Townsend & Jacob Yaron, 2001. "The credit risk-contingency system of an Asian development bank," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 31-48. [Downloadable!]
  4. Alexander Karaivanov, 2003. "Financial Contracts and Occupational Choice," Computing in Economics and Finance 2003 25, Society for Computational Economics. [Downloadable!]
  5. Garratt, Rod & Keister, Todd & Shell, Karl, 2002. "Comparing Sunspot Equilibrium and Lottery Equilibrium Allocations: The Finite Case," Working Papers 02-07, Cornell University, Center for Analytic Economics. [Downloadable!]
    Other versions:
  6. Edward Simpson Prescott & Robert M. Townsend, 2005. "Firms as clubs in Walrasian markets with private information : technical appendix," Working Paper 05-11, Federal Reserve Bank of Richmond. [Downloadable!]
  7. Joon Song, 2007. "Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams," Economics Discussion Papers 633, University of Essex, Department of Economics. [Downloadable!]
  8. Joao Correia-da-Silva & Carlos Herves-Beloso, 2008. "General equilibrium with private state verification," Levine's Working Paper Archive 814577000000000024, David K. Levine. [Downloadable!]
    Other versions:
  9. repec:bep:thetop:v:8:y:2008:i:1:p:1385-1385 is not listed on IDEAS
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  10. CITANNA, Alessandro & CHAKRABORTY, Archishman, 2002. "Occupational Choice, Incentives and Wealth Redistributions with Scarcity of Capital," Les Cahiers de Recherche 788, HEC Paris. [Downloadable!]
  11. CITANNA, Alessandro & CHAKRABORTY, Archishman, 2001. "Occupational Choice, incentives and wealth distribution," Les Cahiers de Recherche 720, HEC Paris. [Downloadable!]
    Other versions:
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