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Resource Allocation and Organizational Form

  • Guido Friebel
  • Michael Raith
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    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)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.2.2.1
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    File URL: http://www.aeaweb.org/aej/mic/app/2008-0027_app.pdf
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    Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

    Volume (Year): 2 (2010)
    Issue (Month): 2 (May)
    Pages: 1-33

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    Handle: RePEc:aea:aejmic:v:2:y:2010:i:2:p:1-33
    Note: DOI: 10.1257/mic.2.2.1
    Contact details of provider: Web page: https://www.aeaweb.org/aej-micro
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    1. Anthony M. Marino & J�n Z�bojn�k, 2004. "Internal Competition for Corporate Resources and Incentives in Teams," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 710-727, Winter.
    2. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
    3. 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 51-, March.
    4. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, vol. 91(2), pages 200-205, May.
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