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Organizing for Synergies

  • Wouter Dessein
  • Luis Garicano
  • Robert Gertner

Large companies are usually organized into business units, yet some activities are almost always centralized in a company-wide functional unit. We first show that organizations endogenously create an incentive conflict between functional managers (who desire excessive standardization) and business-unit managers (who desire excessive local adaptation). We then study how the allocation of authority and tasks to functional and business-unit managers interacts with this endogenous incentive conflict. Our analysis generates testable implications for the likely success of mergers and for the organizational structure and incentives inside multidivisional firms. (JEL D23, D86, G34, L22)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.2.4.77
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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 2 (2010)
Issue (Month): 4 (November)
Pages: 77-114

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Handle: RePEc:aea:aejmic:v:2:y:2010:i:4:p:77-114
Note: DOI: 10.1257/mic.2.4.77
Contact details of provider: Web page: https://www.aeaweb.org/aej-micro
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  1. John Geanakoplos & Paul R. Milgrom, 1988. "A Theory of Hierarchies Based on Limited Managerial Attention," Cowles Foundation Discussion Papers 775R, Cowles Foundation for Research in Economics, Yale University.
  2. Oliver Hart & John Moore, 1999. "On the Design of Hierarchies: Coordination Versus Specialization," Harvard Institute of Economic Research Working Papers 1880, Harvard - Institute of Economic Research.
  3. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Milton Harris & Artur Raviv, 1999. "Organization Design," CRSP working papers 499, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Dessein, Wouter, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 811-38, October.
  6. Yingyi Qian & Gerard Roland & Chenggang Xu, 2006. "Coordination and Experimentation in M-Form and U-Form Organizations," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 366-402, April.
  7. Wouter Dessein & Tano Santos, 2006. "Adaptive Organizations," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 956-985, October.
  8. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  9. Jacques Crémer & Luis Garicano & Andrea Prat, 2007. "Language and the Theory of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 122(1), pages 373-407, 02.
  10. Legros, Patrick & Matthews, Steven A, 1993. "Efficient and Nearly-Efficient Partnerships," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 599-611, July.
  11. 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.
  12. Jacques Cremer, 1980. "A Partial Theory of the Optimal Organization of a Bureaucracy," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 683-693, Autumn.
  13. Alonso, Ricardo & Dessein, Wouter & Matouschek, Niko, 2006. "When Does Coordination Require Centralization?," CEPR Discussion Papers 5802, C.E.P.R. Discussion Papers.
  14. Van den Steen, Eric, 2007. "The Limits of Authority: Motivation versus Coordination," Working papers 37305, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  15. Alfred D. Chandler, 1969. "Strategy and Structure: Chapters in the History of the American Industrial Enterprise," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262530090, June.
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