A Multi-Task Principal-Agent Approach to Organizational Form

David Besanko, Pierre Régibeau, Katharine E Rockett

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

Abstract

This paper studies the choice of organizational forms in a multi-task principal-agent model. We compare a functional organization in which the firm is organized into functional departments such as marketing and R&D to a product-based organization in which the firm is organized into product lines. Managers' compensation can be based on noisy measures of product-line profits. Measures of a functional area's contribution to total profits are not available, however. This effect favors the product organization. However, if there are significant asymmetries between functional area contributions to organizational success and cross-product externalities within functions, organizing along functional lines may dominate the product organization. The functional organization can also dominate when a function is characterized by strong externalities while the other is not.
Original languageEnglish
Pages (from-to)437-467
JournalThe Journal of Industrial Economics
Volume53
DOIs
StatePublished - 2005

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