Divisional Power, Intra-Firm Bargaining and Rent-Seeking Behavior in Multidivisional Corporations

Economics Bulletin, Vol. 4, No. 13, pp. 1-10, 2004

8 Pages Posted: 8 Nov 2004

See all articles by Ram Mudambi

Ram Mudambi

Temple University - Department of Strategic Management

Pietro Navarra

University of Messina - Institute of Economics and Finance; London School of Economics & Political Science - CPNSS

Abstract

Increasing divisional operational responsibilities and the dispersal of knowledge creating activities within the firm have loosened the traditional hierarchical structure of multi-divisional firms. In this paper we argue that a similar mixture of competition and cooperation that is found in inter-firm relationships now characterizes intra-firm relationships. Our model describes a situation in which divisional managers have their own objectives that may diverge from those of the firm as a whole. Thus, divisional managers are both profit-seekers in creating value that can be appropriated and rent-seekers in attempting to maximize their divisional share of the value created by the firm. The profit-seeking activity requires collaboration amongst divisions in maximizing firm profits. The rent-seeking activity is modeled as a bargaining game. The division's bargaining power is a crucial determinant of its (Nash bargaining) equilibrium share of firm profits. We find that when divisional managers are able to take actions to increase their bargaining power, this has a negative effect on the performance of the firm as a whole.

Keywords: multi-divisional firms, managerial rent-seeking, inter-divisional bargaining

JEL Classification: L21, L22, L13

Suggested Citation

Mudambi, Ram and Navarra, Pietro, Divisional Power, Intra-Firm Bargaining and Rent-Seeking Behavior in Multidivisional Corporations. Economics Bulletin, Vol. 4, No. 13, pp. 1-10, 2004, Available at SSRN: https://ssrn.com/abstract=616102

Ram Mudambi (Contact Author)

Temple University - Department of Strategic Management ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-2099 (Phone)
215-204-8029 (Fax)

HOME PAGE: http://sbm.temple.edu/~rmudambi/index.html

Pietro Navarra

University of Messina - Institute of Economics and Finance ( email )

Piazza Pugliatti 1
Messina
Sicilia, 98122
Italy
39-090-676-4446 (Phone)
39-090-292-0014 (Fax)

London School of Economics & Political Science - CPNSS ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
44-207-955-6820 (Phone)

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