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American Economic Journal: Microeconomics: Vol. 2 No. 2 (May 2010)

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Resource Allocation and Organizational Form

Article Citation

Friebel, Guido, and Michael Raith. 2010. "Resource Allocation and Organizational Form." American Economic Journal: Microeconomics, 2(2): 1-33.

DOI: 10.1257/mic.2.2.1

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)

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Authors

Friebel, Guido (Johann Wolfgang Goethe U Frankfurt and Toulouse School of Economics)
Raith, Michael (U Rochester)

JEL Classifications

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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