This paper addresses the problem of allocating resources in a divisionalized firm. The firm consists of n distinct divisions. Inputs have to be allocated acrrss the divisions and the profit function of each division may in general depend on the whole allocation of inputs. The manager of the firm does not know the divisional profit functions and yet would like to allocate resources in a profit-maximizing way. We construct a mechanism whose Nash equilibria generate a profit-maximizing allocation of inputs as well as a system of (endogenously determined) transfer prices. Furthermore, the mechanism uses smaller strategy spaces and intuitively more acceptable evaluation measures than those proposed previously.
- Divisionalized firm
- Profit maximizing allocations
- Transfer prices