Divisional Power, Intra-Firm Bargaining and Rent-Seeking Behavior in Multidivisional Corporations

Increasing divisional operational responsibilities and the dispersal of knowledge creating activities within the firm have loosened the traditional hierarchical structure of multi-divisional firms. In this paper we argue that a similar mixture of competition and cooperation that is found in inter-firm relationships now characterizes intra-firm relationships. Our model describes a situation in which divisional managers have their own objectives that may diverge from those of the firm as a whole. Thus, divisional managers are both profit-seekers in creating value that can be appropriated and rent-seekers in attempting to maximize their divisional share of the value created by the firm. The profit-seeking activity requires collaboration amongst divisions in maximizing firm profits. The rent-seeking activity is modeled as a bargaining game. The division's bargaining power is a crucial determinant of its (Nash bargaining) equilibrium share of firm profits. We find that when divisional managers are able to take actions to increase their bargaining power, this has a negative effect on the performance of the firm as a whole