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)
Friebel, Guido, and Michael Raith.
"Resource Allocation and Organizational Form."
American Economic Journal: Microeconomics,
Firm Behavior: Theory
Organizational Behavior; Transaction Costs; Property Rights
Asymmetric and Private Information
Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance