Information, Evolution of the Institution of the Firm, and the Optimal Decision Horizon

This paper introduces an information problem into Yang and Ng's model of the firm, to study the process of social searching for the efficient structure of residual rights. The analysis adopts the concept of Walrasian sequential equilibrium developed in the literature of endogenous specialization to model this searching process. The main finding is that more organizational patterns will be experimented with, and therefore an efficient organizational pattern is more likely to be achieved as the pricing efficiency increases. The problem of determining the optimal decision horizon is solved by specifying a tradeoff between the benefits and calculation costs from longer decision horizons.