Faculty of Economics and Business Administration Publications Database

Resource Allocation and Organizational Form

Raith, Michael
Volume: 2
Number: 2
Pages: 1 - 33
Month: May
ISSN-Print: 1945-7669
Link External Source: Online Version
Year: 2010
Keywords: Management; Coordinationa; Mergers and Acquisitions; Performance Incentives
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.