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The visible hand, the invisible hand and efficiency

Author: Eitan Goldman; Gary Gorton; National Bureau of Economic Research.
Publisher: Cambridge, MA. : National Bureau of Economic Research, ©2000.
Series: Working paper series (National Bureau of Economic Research), working paper no. 7587.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Abstract: When a firm forms a market closes. Resources that were previously allocated via the price system are allocated by managerial authority within the firm. We explore this choice of organizational form using a model of price formation in which agents negotiate prices on behalf of their principals when there is trade in a market. Principals motivate agents to make efforts and form prices by writing contracts  Read more...
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Details

Genre/Form: Econometric models
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Eitan Goldman; Gary Gorton; National Bureau of Economic Research.
OCLC Number: 70121783
Notes: "March 2000."
Description: 1 online resource (50, [1] pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 7587.
Responsibility: Eitan Goldman, Gary Gorton.

Abstract:

Abstract: When a firm forms a market closes. Resources that were previously allocated via the price system are allocated by managerial authority within the firm. We explore this choice of organizational form using a model of price formation in which agents negotiate prices on behalf of their principals when there is trade in a market. Principals motivate agents to make efforts and form prices by writing contracts contingent on the prices that the agents themselves negotiate. Admitting agency issues into price formation introduces a need for a principal to have the authority to coordinate economic activity. This can be achieved by closing a market and forming a firm, thereby contracting directly with both agents, and centrally directing trade. Closing a market, however, results in a loss of information from market prices, information that can be used to reduce the cost of contracting. This information cannot be replicated by internally generated transfer prices.' Hence, when the market is internalized within the firm, information from market prices is lost. Choice of organizational form, a market or a firm, is then determined by the relative value of central authority over agents (the visible' hand) versus information from market prices (the invisible' hand).

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