Diversification and Delegation in Firms

Vittoria Cerasi and Sonja Daltung ()
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Sonja Daltung: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 131, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper is about the corporate structure, the organizational structure, and the financial structure of firms, and how they relate to each other. We show that separation of ownership and control may arise as a response to overload costs, although it involves agency costs, and that conglomerates can arise due to information problems in capital markets. In a context where entrepreneurs have the ability to run projects and to improve their future cash flow, there could be rationing of credit due to moral hazard between the entrepreneur and external investors. Diversification could mitigate the moral hazard problem. However for a single entrepreneur the running of many different projects might be increasingly costly due to overload, that is when, due to limited attention, the marginal effort becomes less effective. Delegating the running of projects to several managers can not only reduce overload costs, but also reduce the moral hazard problem of external financing. In this paper we show that delegation can be the only way to exploit gains from diversification when overload costs of diversification are high; delegation thus is the key ingredient to be able to diversify.

Keywords: Conglomerates; Delegation; Diversification; Monitoring (search for similar items in EconPapers)
JEL-codes: D23 D82 G20 G32 L22 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2001-12-01
New Economics Papers: this item is included in nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.riksbank.se/upload/Dokument_riksbank/Kat_foa/wp_131.pdf (application/pdf)

Related works:
Working Paper: Diversification and delegation in firms (2002)
Working Paper: Diversification and Delegation in Firms (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0131

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