DP15026 Authority in a theory of the firm

Author(s): Inga Deimen, Dezso Szalay
Publication Date: July 2020
Keyword(s): authority, common and private values, delegation, Noisy information, organizations, ownership, Strategic communication
JEL(s): D82, D83
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15026

We study a simple model of the firm comprised of a production unit, a sales unit, and an owner with interests in both units. The owner has the right to adapt the production quantity to changes in demand and costs. Whether the owner effectively assumes this right or delegates decision-making depends on the relative uncertainty about demand and costs, on the division of surplus in the firm, and on the riskiness of the environment the firm faces. We characterize conditions that make acquiring ownership rights feasible and effcient. The same conditions determine the boundaries of the firm in our model.