Abstract
Big firms necessarily divide responsibility by means of delegation and divisionalization. A commonly held view is that greater flexibility and a more efficient management which result from flatter hierarchies provide the reason for this development. The literature on strategic delegation explores the strategic incentives for delegation when competitors interact with each other in the marketplace. For example, divisionalization of a one product firm, in which divisions compete with one another, may be a device for achieving a higher market share of the entire market.91 Alternatively, vertical delegation decisions that determine the degree of vertical specialization may affect the strategic position of a firm by affecting variable costs.92
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References
See Baye / Crocker / Ju (1996). See also Gonzalez-Maestre (1997), who use a three-stage model, where firms can first choose the number of divisions, then in a second stage the incentive schemes for their managers, and managers choose market strategies in the last stage.
See Gal-Or (1993a).
Milgrom / Roberts (1992), p. 414.
See Milgrom / Roberts (1992), p. 11.
According to Milgrom / Roberts (1992), p. 413, in 1988 about 30% of all firms in the United States used to some extent a bonus scheme based on corporate profits (profit-sharing plans).
This is, for example, the case in IBM. See FT November 27 1991, cited in Faulli-0ller / Giralt (1995), p. 79.
Faulli-Oller / Giralt (1995).
See Appendix B.3 for a proof.
Williamson (1975), p. 153.
As managers are risk-neutral, one could also assume that managers receive 100 % of their evaluation basis and pay a rent to owners, so that managers remain exactly with their opportunity costs.
The impact of asymmetrical cost allocation schemes will be analyzed in chapter 5.
Fairness / equity of a cost allocation is one of the properties often required in the literature dealing with allocation of joint costs. See for example Jensen (1977), p. 844, Horngren / Foster, p. 459 or Ewert/ Wagenhofer (1993), p. 540 – 546. See also Hughes / Scheiner (1980), p. 86 – 87 who emphasize the existence of a trade-off between behavioral benefits and efficiency criteria.
See also Zimmermann (1979) for a justification of this approach: Zimmermann argues that joint costs should be allocated on the basis of expected utilization of a common resource to approximate to opportunity costs which are difficult to measure.
As firms and divisions are symmetrical, the same fixed wage and the same percentage on profits is necesary to secure managers’ reservation utility. Therefore it can be assumed that, given the bonus base, the fixed part of the salary and the amount of the bonus are the same in both firms and both divisions.
Quantity choices of managers depend also on the parameters g and a, and on the quantity choices in the other market. In the figure, those values are kept constant.
In this case, the symmetrical interior solution yields values for αi which are in the range [0, 1]. There are also asymmetrical solutions where αi (αj) reaches infinity, which will not be considered.
See also Appendix B.1.
See also Appendix B.1.
See Appendix B.2.
See Appendix B.2.
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© 2001 Deutscher Universitäts-Verlag GmbH, Wiesbaden
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Neubauer, S. (2001). Strategic delegation and multimarket contact. In: Multimarket Contact and Organizational Design. Beiträge zur betriebswirtschaftlichen Forschung, vol 97. Deutscher Universitätsverlag, Wiesbaden. https://doi.org/10.1007/978-3-663-05979-0_4
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DOI: https://doi.org/10.1007/978-3-663-05979-0_4
Publisher Name: Deutscher Universitätsverlag, Wiesbaden
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