We develop a tractable model of the allocation of ownership and control within firms operating in competitive markets. The model shows how scarcity in the market translates into ownership structure inside the organization. It identifies a price-like mechanism whereby local liquidity or productivity shocks propagate, leading to widespread organizational restructuring. Among the model’s predictions: firms will become more integrated when the terms of trade become more favorable to yhe short side of the market, when the liquidity of the poorest firm increases sufficiently relative to the mean, and following a uniform increase in productivity. Shocks to the first two moments of the liquidity distribution have multiplier effects on the corresponding moments of the distribution of ownership structures.
(revised version of CEPR DP 2573, October 2000. The WP version allows for any level of share of output and shows that the degree of control over decisions and the share of output of an agent covary. The PDF of the WP is available at this link.)