An Influence-cost Model of Organizational Practices and Firm Boundaries
Abstract: This paper explores organizational responses to influence activities - costly activities aimed at persuading decision makers. As Milgrom and Roberts (1988) argued, rigid practices that otherwise seem inefficient can optimally arise. If more complex decisions are more susceptible to influence activities, optimal selection may partially account for observed correlations between firm performance and management-practice quality reported in Bloom and Van Reenen (2007). Further, A firm's boundaries can be shaped by influence-activity considerations, providing a theory of the firm based on ex-post inefficiencies. Finally, boundaries and rigid practices interact: rules under non-integration should be less restrictive than under integration.
