Working Paper: CEPR ID: DP6019
Authors: Wouter Dessein; Luis Garicano; Robert Gertner
Abstract: Multi-product firms create value by integrating functional activities such as manufacturing across business units. This integration often requires making functional managers responsible for implementing standardization, thereby limiting business-unit managers? authority. Realizing synergies then involves a tradeoff between motivation and coordination. Motivating managers requires narrowly-focused incentives around their area of responsibility. Functional managers become biased toward excessive standardization and business-unit managers may misrepresent local market information to limit standardization. As a result, integration may be value-destroying when motivation is sufficiently important. Providing functional managers only with "dotted-line control" (where business-unit managers can block standardization) has limited ability to improve the tradeoff.
Keywords: communication; coordination; incentives; incomplete contracts; merger implementation; organizational design; scope of the firm; task allocation
JEL Codes: D2; D8; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Integrating functional activities across business units (L22) | create synergies (O36) |
| Integration of functional activities (L23) | careful management of incentives (M52) |
| Authority of functional managers (M54) | ability of business unit managers to adapt to local market conditions (M16) |
| Local incentives for business unit managers (M52) | misrepresentation of information to limit standardization (L15) |
| Misrepresentation of information (D83) | conflicts that hinder effective communication and decision-making (D74) |
| Integration effectiveness (L15) | balance of incentives between local and functional managers (M54) |