Resource Allocation and Organizational Form | Zendy

Guido Friebel | Zendy; Michael Raith | Zendy

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Resource Allocation and Organizational Form

Author(s) -

Guido Friebel,

Michael Raith

Publication year - 2010

Publication title -

american economic journal microeconomics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 5.339

H-Index - 40

eISSN - 1945-7685

pISSN - 1945-7669

DOI - 10.1257/mic.2.2.1

Subject(s) - scope (computer science) , competition (biology) , division (mathematics) , industrial organization , microeconomics , resource allocation , division of labour , business , resource (disambiguation) , organizational structure , economies of scope , economics , computer science , economies of scale , management , market economy , ecology , biology , computer network , arithmetic , mathematics , programming language

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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