Ability, Moral Hazard, Firm Size, and Diversification
I develop a model of firm diversification into multiple product lines that is based on the agency problem between the firm's managers and owners. The agency relationship, together with a span-of-control managerial technology, determines an optimal firm size and degree of diversification that are increasing in the manager's ability and therefore positively correlated cross sectionally. I compare the benefits of merger with those achieved by using compensation contracts based on relative performance and show that, for a particular parameterization, the relative value of merger is a nonmonotonic function of the correlation between the productivity signals of the two firms.
Year of publication: |
1988
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Authors: | Aron, Debra J. |
Published in: |
RAND Journal of Economics. - The RAND Corporation, ISSN 0741-6261. - Vol. 19.1988, 1, p. 72-87
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Publisher: |
The RAND Corporation |
Saved in:
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