American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Resource Allocation and Organizational Form
American Economic Journal: Microeconomics
vol. 2,
no. 2, May 2010
(pp. 1–33)
Abstract
We develop a theory of firm scope and structure in which merging two firms allows the integrated firm's top management to allocate resources that are costly to trade. However, information about their use resides with division managers. We show that establishing truthful upward communication raises the cost of inducing managerial effort compared with stand-alone firms. This effect dominates a positive effect on effort driven by competition for the firm's resources. We derive predictions about optimal firm scope and structure. In particular, we show why it is optimal to separate the tasks of allocating resources and running a division. (JEL D21, D23, D82, G34)Citation
Friebel, Guido, and Michael Raith. 2010. "Resource Allocation and Organizational Form." American Economic Journal: Microeconomics, 2 (2): 1–33. DOI: 10.1257/mic.2.2.1Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D23 Organizational Behavior; Transaction Costs; Property Rights
- D82 Asymmetric and Private Information
- G34 Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
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