Markets, hierarchies, and information: On a paradox in the economics of organization

Abstract The literature on the economics of organization presents the following paradox. On the one hand, firms are said to be repositories of superior information about input characteristics. On the other hand, markets are said to be superior to hierarchies in coordinating resource allocation because hierarchies are forced to aggregate heterogeneous inputs into homogeneous categories. This paper suggests reasons for the association of firms with refined input information and argues that it is not their hierarchical features but their provision of an appropriate framework for rent-sharing that is responsible for this association.

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