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Resource Allocation and Organizational Form

Author

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  • Guido Friebel
  • Michael Raith

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)

Suggested Citation

  • Guido Friebel & Michael Raith, 2010. "Resource Allocation and Organizational Form," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 1-33, May.
  • Handle: RePEc:aea:aejmic:v:2:y:2010:i:2:p:1-33 Note: DOI: 10.1257/mic.2.2.1
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    References listed on IDEAS

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    1. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
    4. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    5. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 1-51, March.
    6. Wouter Dessein & Luis Garicano & Robert Gertner, 2010. "Organizing for Synergies," American Economic Journal: Microeconomics, American Economic Association, pages 77-114.
    7. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, pages 200-205.
    8. Anthony M. Marino & Ján Zábojník, 2004. "Internal Competition for Corporate Resources and Incentives in Teams," RAND Journal of Economics, The RAND Corporation, pages 710-727.
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    Citations

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    Cited by:

    1. Orman, Cuneyt, 2015. "Organization of innovation and capital markets," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 94-114.
    2. Dessein, Wouter, 2012. "Incomplete Contracts and Firm Boundaries: New Directions," CEPR Discussion Papers 9019, C.E.P.R. Discussion Papers.
    3. Alonso, Ricardo & Dessein, Wouter & Matouschek, Niko, 2015. "Organizing to adapt and compete," LSE Research Online Documents on Economics 58647, London School of Economics and Political Science, LSE Library.
    4. Junichiro Ishida, 2014. "Hierarchies Versus Committees: Communication and Information Acquisition in Organizations," ISER Discussion Paper 0914, Institute of Social and Economic Research, Osaka University.
    5. Junichiro Ishida, 2015. "Hierarchies Versus Committees: Communication and Information Acquisition in Organizations," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 62-88, March.
    6. Duncan Simester & Juanjuan Zhang, 2010. "Why Are Bad Products So Hard to Kill?," Management Science, INFORMS, pages 1161-1179.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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