Observability and Endogenous Organizations

This paper establishes a relationship between the observability of common shocks and optimal organizational design under a multiagent moral hazard environment. We show that, with sucient information about common shocks, a cooperative organization can be optimal even if outputs are highly correlated. This is consistent with the empirical observation that cooperative arrangements may be more prevalent when outputs are correlated. The model is then embedded in a Walrasian equilibrium model where choices of organization and investment on information about common shocks are determined jointly. Numerical results reveal that both cooperative and individualistic regimes can coexist in equilibrium. The interplay between organization, investment in information, and inequality is thus analyzed.