| In the first chapter of this dissertation I present a theory of the boundary of the firm that accounts for some important characteristics of multidivisional firms. In this setup, vertical integration is desirable, as long as the choice of trading partners can be credibly delegated to the divisions' managers. I show that this is satisfied not only under the assumption of full commitment by the general office of the firm, but also interestingly, if it has no commitment power at all. An explanation of the boundaries of the firm emerges only if the general office retains some limited commitment power. I show that the general office mandates internal trades in more instances than would have been optimal with full commitment, adversely affecting the levels of investment taken by the divisions' managers. In such cases, it can be optimal to have the trade conducted between non-integrated parties.; The second chapter explores the reasons why large multidivisional integrated firms often encourage conflict between units over the transfer price of internally traded inputs. I show that due to informational asymmetries, it is beneficial for the firm's general office to allow the trading divisions to influence the internal transfer price by eliciting and presenting supply and purchase bids from external sources, even if internal trade is superior and the elicitations of bids is costly. Bids collected by a division are positively correlated with the other division's private information, allowing the general office to "tighten its control" over the division managers, lowering their information rents and increasing their targeted effort.; In the third chapter I analyze the interdependence in the manner in which different firms organize their supply relations. In the multi-buyer, multi-supplier framework I develop, firms choose whether to integrate upstream into the supply of the input or to outsource its production, and the size of their supplier network if outsourcing. Suppliers taking designs by several buyers enjoy economies of scope in investment due either to spillovers of know-how, or to savings in setup costs. The model admits multiple vertical equilibria that are Pareto-ranked, the one with the highest level of outsourcing being most efficient. I find that outsourcing is more pervasive in bigger markets and when the economies of scope in investments are stronger. The optimal size of the supplier network however decreases when the spillovers are stronger. |
