This project attempts to develop a theoretical framework for analyzing different aspects of the internal organization structure of large firms, as well as of contractual nexuses among firms. Particular aspects analyzed include: hierarchical delegation of authority to design (sub)contracts, the breadth and depth of hierarchies, planning and supervision activities of managers, organizational diseconomies of scale, transfer pricing mechanisms, and the grouping of activities into different divisions. The approach adopted is to suppose that information regarding cost and market conditions is dispersed among different agents in the organization, and that they can communicate with one another in a restricted manner. Managers act strategically with respect to their private information. The organization is thus characterized by a decentralized decision-making mechanism which strikes a balance between the advantages of adaption to location information, and the disadvantage of control losses arising from managerial incentive problems. The short-term goal of the research is to develop consistent theoretical models of the above mentioned aspects of organizational structure. In the long run these models should generate predictions regarding the connection between organizational structure, and more fundamental characteristics such as the nature of technology, information structure, production scale, product demand, and product market competition.
