(PRELIMINARY–not for distribution) Integration, Delegation, and Management∗

We present a competitive industry equilibrium model in which managerial scarcity affects the joint determination of firm boundaries and internal decision-making structures. Integration through asset sale grants authority to a manager, who may choose to delegate decision making back to his subordinates, or to retain control for himself, depending on his comparative advantage in coordinating activities, which he learns after contracting. Exogenous productivity and industry price are key determinants of both integration and delegation: across a heterogeneous population of firms, or with variation in price, delegation and integration may co-vary. There is an inverted U relationship between integration and price levels. When managers are scarce, a lower proportion of managers increases total output in the industry when the product market demand is high, and decreases total output when demand is low. In this sense, there may be too much integration when prices are high and too little when prices are low.