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Title:A double moral hazard model of organization design PDF Logo
Authors:Berkovitch, Elazar
Israel, Ronen
Spiegel, Yossi
Issue Date:2007
Series/Report no.:CSIO working paper 0094
Abstract:We develop a theory of organization design in which the firm's structure is chosen to mitigate moral hazard problems in the selection and the implementation of projects. For a given set of projects, the 'divisional structure' which gives each agent the full responsibility over a subset of projects is in general more efficient than the functional structure under which projects are implemented by teams of agents, each of whom specializes in one task. However, the ex post efficiency of the divisional structure may encourage the firm's manager to select more expensive (but still profitable) projects ex ante. We examine how the tradeoff between the ex post inefficiency in the implementation of projects and the ex ante inefficiency in the selection of projects is affected by various factors like size, complexity, and asymmetry in the importance of tasks. We also explore the desirability of adopting a narrow business strategy and the implications of managerial work overload for organizational structure.
Subjects:Divisional structure
functional structure
project selection
moral hazard
moral hazard in teams
narrow business strategy
JEL:D23
Document Type:Working Paper
Appears in Collections:CSIO Electronic Working Papers, Northwestern University

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