Resource Allocation and Organizational Form

American Economic Journal: Microeconomics, Forthcoming

Simon School Working Paper No. FR 09-13

53 Pages Posted: 2 Sep 2009

See all articles by Guido Friebel

Guido Friebel

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Michael Raith

University of Rochester - Simon Business School

Date Written: January 1, 2009

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.

Keywords: theory of the firm, coordination,authority, incentives, strategic information transmission,hierarchy

JEL Classification: D23, D82, L22, M52

Suggested Citation

Friebel, Guido and Raith, Michael, Resource Allocation and Organizational Form (January 1, 2009). American Economic Journal: Microeconomics, Forthcoming, Simon School Working Paper No. FR 09-13, Available at SSRN: https://ssrn.com/abstract=1466808

Guido Friebel

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Michael Raith (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-8380 (Phone)
585-273-1140 (Fax)

HOME PAGE: http://works.bepress.com/michael_raith/

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