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A Double Moral Hazard Model of Organization Design
Author(s) -
Berkovitch Elazar,
Israel Ronen,
Spiegel Yossi
Publication year - 2010
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2009.00245.x
Subject(s) - profitability index , moral hazard , ex ante , industrial organization , set (abstract data type) , selection (genetic algorithm) , microeconomics , hazard , business , economics , computer science , incentive , finance , chemistry , organic chemistry , artificial intelligence , programming language , macroeconomics
We develop a theory of organization design in which the firm's structure is chosen by trading off ex post efficiency in the implementation of projects against ex ante efficiency in the selection of projects. Using our framework, we derive a novel set of empirical predictions regarding differences between firms with a functional structure and firms with a divisional structure. We examine how the overall profitability of the two structures is affected by various factors like size, complexity, and asymmetry in the importance of tasks and also explore the desirability of adopting a narrow business strategy.