Diversification and Delegation in Firms

Sveriges Riksbank Working Paper No. 131

33 Pages Posted: 12 Mar 2002

See all articles by Vittoria Cerasi

Vittoria Cerasi

Bicocca University - Department of Economics, Management & Statistics (DEMS)

Sonja Daltung

Ministry of Finance

Date Written: January 2002

Abstract

This paper shows how separation of ownership and control may arise as a response to overload costs, despite agency costs, and how conglomerates arise as solution to information asymmetries in capital markets. In a context where entrepreneurs have the ability to run projects and improve their future cash flow, there could be rationing of credit due to moral hazard between entrepreneurs and investors. Diversification could mitigate the moral hazard problem. However for a single entrepreneur running many different projects might be increasingly costly due to overload costs. Delegating the running of projects to several managers can not only reduce overload costs, but also the moral hazard problem of external financing. In this paper we show that delegation can be the only way to exploit the gains from diversification when overload costs of diversification are high; delegation thus is the key ingredient to be able to diversify.

Keywords: Conglomerates; Delegation; Diversification; Monitoring

JEL Classification: D23, D82, G20, G32, L22

Suggested Citation

Cerasi, Vittoria and Daltung, Sonja, Diversification and Delegation in Firms (January 2002). Sveriges Riksbank Working Paper No. 131. Available at SSRN: https://ssrn.com/abstract=303239 or http://dx.doi.org/10.2139/ssrn.303239

Vittoria Cerasi (Contact Author)

Bicocca University - Department of Economics, Management & Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy
+39-02-64485821 (Phone)
+39-02-64485878 (Fax)

Sonja Daltung

Ministry of Finance ( email )

Drottningatan 21
Stockholm 10333, 103 33
Sweden

HOME PAGE: http://www.sweden.gov.se/

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