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Delegation of authority, managerial initiatives, and the design of divisional structure

Listed author(s):
  • Riyanto, Yohanes E.

    (Groningen University)

This paper provides a rationale for a firm to adopt either an integrated or a separated divisional structure, which is based on the interplay between the structure of authority and the costs and benefits of integration vis-a-vis separation. We use the framework of Aghion and Tirole (1997) to explain the structure of authority. This framework captures the notion of managerial initiatives. It shows that monitoring by the head office decreases divisional managers' effort levels. We incoporate this framework into the analysis of costs and benefits of integrating or separating divisions. Integration will be beneficial for the head office if it generates synergy gains. The larger the synergy gains are, the more appealing integration will be. Consequently, the head-office's incentive to monitor increases. Due to a more intense monitoring, managers exert lower effort levels. For managers, integration entails costs and benefits. If the benefits outweigh the costs, managers will be motivated to exert high effort levels in an integrated divisional structure. The optimality of integrating or separating divisions will then be determined by the trade-off between synergy gains and the managerial effort elicitation

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File URL: http://irs.ub.rug.nl/ppn/241228506
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Paper provided by University of Groningen, CCSO Centre for Economic Research in its series CCSO Working Papers with number 200011.

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Date of creation: 2000
Handle: RePEc:gro:rugccs:200011
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  1. 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.
  2. Jean Tirole, 1988. "The Multicontract Organization," Canadian Journal of Economics, Canadian Economics Association, vol. 21(3), pages 459-466, August.
  3. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 201-228, Fall.
  4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  5. Trond E. Olsen, 1996. "Agency Costs and the Limits of Integration," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 479-501, Autumn.
  6. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  7. de Bijl, P.W.J., 1996. "Essays in industrial organization and management strategy," Other publications TiSEM 702f75c5-9ca8-4150-ba8b-e, Tilburg University, School of Economics and Management.
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