Organizational design for business units

Article Abstract:

Decentralized firms are compared with respect to the allocation of tasks from the parent company to its various business divisions and the extent of compensation risk placed upon division managers. It is hypothesized that organizational structure decisions in these firms are influenced by two factors: the task expertise of the parent company in relation to that of the business unit, and the relative importance of the division to the performance of the parent organization. A principal-agent model of the task allocation and compensation risk decision, as influenced by the two aforementioned factors, is developed. The findings show that the principal's relative expertise and the relative importance of the division boost the compensation risk placed on the division manager, whereas task allocation is found to be a decreasing function.

Industrial organization

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Centralization, delegation, and shared responsibility in the assignment of capital investment decision rights

Article Abstract:

The centralization versus decentralization debate in managerial accounting is analyzed. The study focuses on the issue of the assignment of a firm's capital investment decision rights. It attempts to identify circumstances under which it is advantageous to assign such rights to the owner, to the manager in charge of the funded project, or to both of them. These circumstances are related to the manager's required amount of investment in firm-specific human capital. Findings suggest that capital investment decision rights are likely to be centralized when firm-specific investment is not a condition, to be shared between the owner and the manager when the investment is moderate, and to be totally decentralized when the manager's investment is considerable.

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Discussion of centralization, delegation, and shared responsibility in the assignment of capital investment decision rights

Article Abstract:

Baiman and Rajan (1995) examined how organizational forms are chosen in the context of relationship-specific investment and incomplete contracting. Their study considered the problem of deciding between a centralized organization where the principal determines the level of capital asset investment, and a decentralized organization where capital investment decision rights are assigned. Their findings suggest the principal's choice between the two organizational forms is determined by the level of firm-specific investment that the agent is required to make. The Baiman and Rajan study's contributions to the centralization-decentralization debate and to the theory of the firm are discussed.

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