The Design of Organizational Forms in the Presence of Uncertainty and Asymmetric Information: Integration, Delegation or both?

Luisa Affuso

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: Despite the abundance, especially in the retailing industry of 'hybrid' organizational forms, characterized by the contemporaneous adoption of vertical integration patterns and delegation via franchise arrangements (namely, Partial Vertical Integration, P.V.I.) within the same firm, no explanation of the phenomenon has been provided by the literature. The main purpose of this paper is to provide a contribution to fill this void. It proposes a principal-agent model based on the presence of asymmetric information, of the form of both hidden action and hidden information and uncertainty. The model is characterized by a monopolistically competitive market for the product and by heterogeneous agents on the job market. It is solved for it's socially optimal general equilibrium by means of non linear programming within a simulation analysis. The re4sults provide a first best solution characterized by a separating equilibrium whereby the firm offers both fix (efficiency) wage management contracts and franchising contracts (i.e. P.V.I.), thus earning rents to the agents. Finally, the last part of this article is devoted to comparative statics analysis of the model by a simulation of the business cycle in order to study the changes in the organizational form predicted by the model over phases of expansion and recession. These predictions are found to compare favorably with empirical evidence.

Pages: 28 pages
Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:470

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