Resource Allocation and Organizational Form

Guido Friebel () and Michael Raith

American Economic Journal: Microeconomics, 2010, vol. 2, issue 2, 1-33

Abstract: We develop a theory of firm scope and structure in which merging two firms allows the integrated firm's top management to allocate resources that are costly to trade. However, information about their use resides with division managers. We show that establishing truthful upward communication raises the cost of inducing managerial effort compared with stand-alone firms. This effect dominates a positive effect on effort driven by competition for the firm's resources. We derive predictions about optimal firm scope and structure. In particular, we show why it is optimal to separate the tasks of allocating resources and running a division. (JEL D21, D23, D82, G34)

JEL-codes: D21 D23 D82 G34 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/mic.2.2.1
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Citations: View citations in EconPapers (39)

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