JEL Classification Numbers: D23, L23
| A double moral hazard model of organization design |
| Elazar Berkovitch, IDC Herzliya |
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| Yossi Spiegel, Tel Aviv University |
| Current version: February 2009 |
| Abstract: We develop a theory of organization design in which the firm's structure is chosen to mitigate moral hazard problems in the selection and the implementation of projects. For a given set of projects, the "divisional structure," which gives each agent the full responsibility over a subset of projects, is more efficient than the "functional structure" under which projects are implemented by teams of agents, each of which specializes in one task. However, the ex post efficiency of the divisional structure may encourage the firm's manager to select more expensive (but still profitable) projects ex ante. We examine how the tradeoff between ex post efficiency in the implementation of projects and ex ante efficiency in the selection of projects is affected by various factors like size, complexity, and asymmetry in the importance of tasks. We also explore the desirability of adopting a narrow business strategy. |
| Keywords:Divisional
structure, functional structure, project selection, moral hazard, moral
hazard in teams, narrow business strategy
JEL Classification Numbers: D23, L23 |
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| Last updated: February 28, 2009 |