37 Pages Posted: 24 Nov 2001
Date Written: November 13, 2001
An important difference between intra-firm and inter-firm transactions is that the former takes place under the governance of a "headquarters," which often remains aloof from the transaction yet retains ultimate authority over it. We show that when trading parties' relationship-specific investments directly affect the other's profit, the presence of such headquarters is necessary to achieve the (ex ante) efficient level of investment. Further, because internal trade is not always optimal, we show how a poorly informed headquarters can implement (ex post) optimal type of trade. We present a simple mechanism that enables the headquarters to extract the managers' information through deliberate creation of disagreement over trade. The model is consistent with the real world headquarters' using divisional disputes in choosing between internal and external trades, as witnessed by Eccles.
JEL Classification: D23, G30, L22, L23
Suggested Citation: Suggested Citation
Choi, Albert H., The Role of Headquarters in Firm-specific Investment and Intra-firm Trade (November 13, 2001). Available at SSRN: https://ssrn.com/abstract=291533 or http://dx.doi.org/10.2139/ssrn.291533