Integration and Information: Markets and Hierarchies Revisited
We analyze a rational-expectations model of price formation in an intermediate-good market under uncertainty. There is a continuum of dyads, each consisting of an upstream party and a downstream party. Both parties can make specific investments at private cost, and there is a machine that either party can own. As in property-rights models, different ownership structures create different incentives for the parties' investments. As in rational-expectations models, some parties may invest in acquiring information, which is then incorporated into the market-clearing price by the parties' trading behaviors. The informativeness of the price mechanism affects the returns to specific investments and hence the optimal ownership structure for individual dyads; meanwhile, the ownership choices by individual dyads affect the informativeness of the price mechanism. In equilibrium the informativeness of the price mechanism can induce ex ante homogenous dyads to choose heterogeneous ownership structures.
Document Object Identifier (DOI): 10.3386/w15779
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