A nonparametric revealed preference test of optimal intra-firm resource allocation

Abstract

The collective rationality hypothesis initiated by Chiappori (1988a) and applied by Seaton (1997, 2001) for a two-person household is used to distinguish the organizational behaviour of firms. Firms produce satisfaction to groups as traditional managerial and early behavioural theories of the firm of Williamson, Baumol and Marris suggest, as well as more modern principle agent models. Under certain conditions, intra-firm bargaining leads to a Pareto optimal outcome. What makes this work an important contribution is that it identifies a set of nonvacuous testable restrictions to empirically detect if firm-level data satisfy Pareto optimal behaviour for the main decision makers in the organization.

Acknowledgement

I am grateful to an anonymous referee for the profit centre example in Section II and also suggestions on the presentation of results. All errors and omissions remain my own responsibility.

Notes

¹See e.g. Leuthold (1968), Manser and Brown (1980), McElroy and Horney (1981), Lundberg (1988), Bourguinon and Chiappori (1992), Famulari (1995), Fortin and Lacroix (1997), Browning and Chiappori (1998) and Vermeulen (2002).