A Multi-Task Principal-Agent Approach to Organizational Form

31 Pages Posted: 3 Jan 2006

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)

Katharine Rockett

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

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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 favors 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. The functional organization can also dominate when a function is characterized by strong externalities while the other is not.

Suggested Citation

Besanko, David A. and Regibeau, Pierre and Rockett, Katharine, A Multi-Task Principal-Agent Approach to Organizational Form. Journal of Industrial Economics, Vol. 53, No. 4, pp. 437-467, December 2005. Available at SSRN: https://ssrn.com/abstract=870631 or http://dx.doi.org/10.1111/j.1467-6451.2005.00265.x

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

Katharine Rockett

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206 873 333 (Phone)
+44 1206 873 724 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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