The structure of firms

Abstract

This paper studies different organizational forms within a single framework. The U-form is modelled as a two-round communication game between a principal and agents with unobservable efforts and adverse selection problems. The M-form is modelled by considering a one-round communication game with pure adverse selection. Feasible and optimal mechanisms are characterized. The profit functions are derived and an extension of Hotelling's Lemma proved. In the absence of the control loss problems flowing form the unobservability of agent effort levels, the U-form will be superior to the M-form. Both forms will be superior to the Corrupted M-form.