A Double Moral Hazard Model of Organization Design

31 Pages Posted: 26 Jan 2010

See all articles by Elazar Berkovitch

Elazar Berkovitch

Interdisciplinary Center, Herzliyah

Ronen Israel

Interdisciplinary Center, Herzliyah

Yossi Spiegel

Tel Aviv University, Coller School of Management; Centre for Economic Policy Research (CEPR); ZEW – Leibniz Centre for European Economic Research

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Abstract

We develop a theory of organization design in which the firm's structure is chosen by trading off ex post efficiency in the implementation of projects against ex ante efficiency in the selection of projects. Using our framework, we derive a novel set of empirical predictions regarding differences between firms with a functional structure and firms with a divisional structure. We examine how the overall profitability of the two structures is affected by various factors like size, complexity, and asymmetry in the importance of tasks and also explore the desirability of adopting a narrow business strategy.

Suggested Citation

Berkovitch, Elazar and Israel, Ronen and Spiegel, Yossi, A Double Moral Hazard Model of Organization Design. Journal of Economics & Management Strategy, Vol. 19, Issue 1, pp. 55-85, Spring 2010. Available at SSRN: https://ssrn.com/abstract=1542316 or http://dx.doi.org/10.1111/j.1530-9134.2009.00245.x

Elazar Berkovitch (Contact Author)

Interdisciplinary Center, Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Ronen Israel

Interdisciplinary Center, Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-9527306 (Phone)

Yossi Spiegel

Tel Aviv University, Coller School of Management ( email )

Ramat Aviv, Tel Aviv, 69978
Israel
972-3-640-9063 (Phone)
972-3-640-7739 (Fax)

HOME PAGE: http://www.tau.ac.il/~spiegel

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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