A Multi-Task Principal-Agent Approach to Organizational Form

45 Pages Posted: 20 Dec 2001

See all articles by David Besanko

David Besanko

Northwestern University - Kellogg School of Management

Pierre Regibeau

University of Essex - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2000

Abstract

This paper studies the choice of organizational forms in a multi-task principal-agent model. We compare a functional organization in which the firm is organized into functional departments such as marketing and R&D to a product-based organization in which the firm is organized into product lines. Managers' compensation can be based on noisy measures of product-line profits. Measures of a functional area's contribution to total profits are not available, however. This effect favours the product organization. However, if there are significant asymmetries between functional area contributions to organizational success and cross-product externalities within functions, organizing along functional lines may dominate the product organization. We also consider the effects of diseconomies of span of control and cross-functional complementarities. Diseconomies of span of control sometimes favours the product organization and sometimes favour the functional organization. Cross-functional complementaries tend to make the product organization relatively more profitable.

Keywords: Organizational form, functional organization, product organization, principal-agent models

JEL Classification: D20, L0, L10, L20, M20

Suggested Citation

Besanko, David A. and Regibeau, Pierre, A Multi-Task Principal-Agent Approach to Organizational Form (May 2000). CEPR Discussion Paper No. 2443. Available at SSRN: https://ssrn.com/abstract=231891

David A. Besanko (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States
847-467-6505 (Phone)
847-467-1777 (Fax)

Pierre Regibeau

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206 872 731 (Phone)
+44 1206 873 598 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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