Working Paper: CEPR ID: DP1625
Authors: Rudolf Kerschbamer; Yanni Tournas
Abstract: This paper studies the factors determining plant size and interplant output allocation within the boundaries of a multiplant firm under conditions of demand uncertainty. It shows that asymmetric information between headquarters and individual plants is one factor determining plant size and output allocation: since the existence of excess capacity creates ?high powered? incentives for individual plants, capacity levels in a second-best setting exceed the corresponding benchmark in a first-best world if capacity prices are low. The presence of ?agency costs? in the case of fully-utilized capacity reverses this result for high-capacity prices. Also, in a recession output is not necessarily assigned to the plant with the lowest production costs.
Keywords: multiplant firm; excess capacity; asymmetric information
JEL Codes: D82; L22; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excess capacity (D24) | high-powered incentives for individual plants (M52) |
| high-powered incentives for individual plants (M52) | optimal output allocation decisions (L21) |
| optimal output allocation decisions (L21) | not necessarily assigned to lowest production costs (D20) |
| excess capacity (D24) | competition among plants (D41) |
| competition among plants (D41) | increase in profits by reducing average production costs (D24) |
| average cost of output provision (D24) | increasing in demand for given capacities (D25) |