The Role of Headquarters in Firm-Specific Investment and Intra-Firm Trade

37 Pages Posted: 24 Nov 2001

See all articles by Albert H. Choi

Albert H. Choi

University of Michigan Law School; European Corporate Governance Institute (ECGI)

Date Written: November 13, 2001

Abstract

An important difference between intra-firm and inter-firm transactions is that the former takes place under the governance of a "headquarters," which often remains aloof from the transaction yet retains ultimate authority over it. We show that when trading parties' relationship-specific investments directly affect the other's profit, the presence of such headquarters is necessary to achieve the (ex ante) efficient level of investment. Further, because internal trade is not always optimal, we show how a poorly informed headquarters can implement (ex post) optimal type of trade. We present a simple mechanism that enables the headquarters to extract the managers' information through deliberate creation of disagreement over trade. The model is consistent with the real world headquarters' using divisional disputes in choosing between internal and external trades, as witnessed by Eccles.

JEL Classification: D23, G30, L22, L23

Suggested Citation

Choi, Albert H., The Role of Headquarters in Firm-Specific Investment and Intra-Firm Trade (November 13, 2001). Available at SSRN: https://ssrn.com/abstract=291533 or http://dx.doi.org/10.2139/ssrn.291533

Albert H. Choi (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

HOME PAGE: http://www.law.umich.edu/FacultyBio/Pages/FacultyBio.aspx?FacID=alchoi

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://ecgi.global/users/albert-h-choi

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