Working Paper: CEPR ID: DP2573
Authors: Patrick Legros; Andrew Newman
Abstract: We provide a simple framework for analysing how organizations are designed in a competitive economy. We focus on the allocation of rights of control and show that in the presence of liquidity constraints, transferring authority can serve as an effective means of transferring surplus, although this may entail some efficiency loss. The efficiency and organizational structure of a typical firm will depend on the liquidity of the ?marginal? agent in the market and not just on the liquidity and technology of the members of the firm. Liquidity changes in a small fraction of the population can lead to restructuring of ownership throughout the economy.
Keywords: Contract theory; Mergers; Ownership; Shocks to distribution
JEL Codes: D23; D31; G34; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity constraints (E41) | organizational restructuring (L22) |
| liquidity levels (G33) | efficiency of organizational structures (L22) |
| liquidity of marginal agents (E41) | efficiency and organizational structure of firms (L23) |
| liquidity changes in a small fraction of the population (E41) | extensive restructuring of ownership across the economy (P31) |
| market power and liquidity (G19) | degree of control within firms (L22) |
| decreasing interest rates and stochastic shifts in liquidity distribution (E43) | increased centralized control (H77) |
| decreasing interest rates and stochastic shifts in liquidity distribution (E43) | decreased aggregate performance (D29) |