NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Eitan Goldman

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Working Papers and Chapters

March 2000The Visible Hand, the Invisible Hand and Efficiency
with Gary Gorton: w7587
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 in...

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers only

 
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