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Information Production and Capital Allocation: Decentralized versus Hierarchical Firms

Jeremy C. Stein
The Journal of Finance
Vol. 57, No. 5 (Oct., 2002), pp. 1891-1921
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/3094499
Page Count: 31
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Information Production and Capital Allocation: Decentralized versus Hierarchical Firms
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Abstract

This paper asks how well different organizational structures perform in terms of generating information about investment projects and allocating capital to these projects. A decentralized approach-with small, single-manager firms-is most likely to be attractive when information about projects is "soft" and cannot be credibly transmitted. In contrast, large hierarchies perform better when information can be costlessly "hardened" and passed along inside the firm. The model can be used to think about the consequences of consolidation in the banking industry, particularly the documented tendency for mergers to lead to declines in small-business lending.

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