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This paper assesses different organizational forms in terms of their ability to generate information about investment projects and allocate capital to these projects efficiently. A decentralized approach–with small, single-manager firms–is most likely to be attractive when information about individual projects is “soft ” and cannot be credibly transmitted. Moreover, holding fixed firm size, soft information also favors flatter organizations with fewer layers of management. In contrast, large hierarchical firms with multiple layers of management are at a comparative advantage when information can be costlessly “hardened ” and passed along within the hierarchy. As a concrete application of the theory, the paper discusses the consequences of consolidation in the banking industry. It has been documented that when large banks acquire small banks, there is a pronounced decline in lending to small businesses. To the extent that smallbusiness lending relies heavily on soft information, this is exactly what the theory would lead one to expect.

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Abstract: Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally "difficult" credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

We develop a two-tiered agency model that shows how rent-seeking behavior on the part of division managers can subvert the workings of an internal capital market. By rent-seeking, division mangers can raise their bargaining power and extract greater overall compensation from the CEO. And because the CEO is herself an agent of outside investors, this extra com- pensation may take the form not of cash wages, but rather of preferential capital budgeting allocations. One interesting feature of our model is that it implies a kind of "socialism" in internal capital allocation, whereby weaker divisions get subsidized by stronger ones.

This paper studies delegation as an alternative to communication. We show that a principal prefers to delegate control to a better informed agent rather than to communicate with this agent as long as the incentive conßict is not too large relative to the principal’s uncertainty about the environment. We further identify cases in which the principal optimally delegates control to an ’intermediary’, and show that keeping a veto-right typically reduces the expected utility of the principal unless the incentive conßict is extreme. JEL ClassiÞcation: D23, D82.

We investigate the effect of scale on performance in the active money management industry. We first document that fund returns, both before and after fees and expenses, decline with lagged fund size, even after adjusting these returns by various performance benchmarks. We then explore a number of potential explanations for this relationship. We find that this relationship is most pronounced among funds that have to invest in small and illiquid stocks, which suggests that the adverse effects of scale are related to liquidity. Controlling for its size, a fund’s performance actually increases with the asset base of the other funds in the family that the fund belongs to. This suggests that scale need not be bad for fund returns depending on how the fund is organized. Finally, we explore the idea that scale erodes fund performance because of the interaction of liquidity and organizational diseconomies.

Transactions take place in the rm rather than in the market because the rm o ers agents who make speci c investments power. Past literature emphasizes the allocation of ownership as the primary mechanism by which the rm does this. Within the contractibility assumptions of this literature, we identify a potentially superior mechanism, the regulation of access to critical resources. Access can be better than ownership because: i) the power agents get from access is more contingent on them making the right investment; ii) ownership has adverse e ects on the incentive to specialize. The theory explains the importance of internal organization and third party ownership. A preliminary version of this paper circulated with the title \Implicit Property Rights in a Theory of the

Using a detailed database of managerial job descriptions, reporting relationships, and compensation structures in over 300 large U.S. firms we find that the number of positions reporting directly to the CEO has gone up significantly over time. We also find that the number of levels between the lowest managers with profit center responsibility (division heads) and the CEO has decreased and more of these managers are reporting directly to the CEO. Moreover, more of these managers are being appointed officers of the company. It does not seem that divisional heads are handling larger tasks making them important enough to report directly. Instead, our findings suggest that layers of intervening management are being eliminated and the CEO is coming into direct contact with more managers in the organization, even while managerial responsibility is being extended downwards. Consistent with this, we find that the elimination of the intermediate position of Chief Operating Officer accounts for a significant part (but certainly not all) of the increase in CEO reports. It is also accompanied with greater authority being given to divisional managers. The structure of pay is also different in flatter organizations. Pay and long term

Do foreign banks shy away from relationship loans requiring close monitoring and soft information in emerging economies? The difficulty in answering this question lies in separating distance constraints, i.e. constraints faced by foreign banks due to control from long distances, from traditional constraints (the usual agency costs), and borrower fundamentals. This paper separates the three by exploiting a unique panel data set containing detailed loan-level information on the universe of all 79,323 private bank loans in Pakistan. The results indicate that distance constraints significantly prevent foreign banks from lending to “informationally difficult ” yet fundamentally sound clients requiring relational contracting. Consistent with this notion, I also find that foreign banks are less likely to bilaterally renegotiate (they litigate more), and are considerably less successful at recovering defaults. A number of independent tests show that neither traditional constraints nor fundamentals are able to explain these findings. Graduate School of Business, University of Chicago.