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dc.contributor.authorLevy, Nadaven_US
dc.description.abstractIn this paper I present a theory of the boundary of the firm that accounts forsome important characteristics of real-world multidivisional firms: Operative decisionsare in the hands of middle managers who are rewarded with incentive contracts based onthe performance of their units; Managers' decisions are subject to approval andintervention by the top management of the firm; and managers are better informedregarding the affairs of their divisions than their superiors in the firm's hierarchy. In thissetup, the integration of a producer of an intermediate input and its buyer as separatedivisions within a single firm is unambiguously desirable, as long as the choice of tradingpartners can be credibly delegated to the divisions' managers. I show that this is satisfiednot only under the assumption of full commitment by the general office of the firm, butalso interestingly, if it has no commitment power at all. At the time of trade, theuninformed general office prefers to delegate the choice of trading partners to thedivisions whose decision is ex-post optimal. An explanation of the boundaries of the firmemerges only if we assume that the general office retains some limited commitmentpower. The general office may then mandate internal trade in order to encourage thedivisions to specialize towards one another before the trade. In the context examined, Ishow that the general office faces a 'time-consistency' problem. It tends to mandateinternal trades in more instances than would have been optimal with full commitment,adversely affecting the levels of investment taken by the divisions' managers. Wheneversuch inconsistency arises, it may be optimal to have the trade conducted betweenindependent, non-integrated parties.en_US
dc.relation.ispartofseries|aCSIO working paper / Northwestern University, Center for the Study of Industrial Organization |x0035en_US
dc.subject.stwTheorie der Unternehmungen_US
dc.titleThe Boundary of the Firm in a Model of Trade Within a Hierarchyen_US
dc.typeWorking Paperen_US

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