DP2573 Competing for Ownership

Author(s): Patrick Legros, Andrew Newman
Publication Date: October 2000
Keyword(s): Contract Theory, Mergers, Ownership, Shocks to Distribution
JEL(s): D23, D31, G34, L22
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2573

We provide a simple framework for analysing how organizations are designed in a competitive economy. We focus on the allocation of rights of control and show that in the presence of liquidity constraints, transferring authority can serve as an effective means of transferring surplus, although this may entail some efficiency loss. The efficiency and organizational structure of a typical firm will depend on the liquidity of the ‘marginal’ agent in the market and not just on the liquidity and technology of the members of the firm. Liquidity changes in a small fraction of the population can lead to restructuring of ownership throughout the economy.