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Resource Allocation and Organizational Form

Author

Listed:
  • Guido Friebel
  • Michael Raith

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)

Suggested Citation

  • Guido Friebel & Michael Raith, 2010. "Resource Allocation and Organizational Form," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 1-33, May.
    • Handle: RePEc:aea:aejmic:v:2:y:2010:i:2:p:1-33
    Note: DOI: 10.1257/mic.2.2.1
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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