Competing for Ownership . Patrick LEGROS Andrew

We develop a tractable model of the allocation of control in firms in competitive markets, which permits us to study how changes in the scarcity of assets, skills or liquidity in the market translate into control inside the organization. Firms will be more integrated when the terms of trade are more favorable to the short side of the market, when liquidity is unequally distributed among existing firms and following a uniform increase in productivity. We identify a multiplier effect of the first two moments of the distribution of liquidity on the moments of the distribution of ownership. The model identifies a price-like mechanism whereby local liquidity or productivity shocks propagate and lead to widespread organizational restructuring. ∗We are grateful to Philippe Aghion, Mathias Dewatripont, Robert Gibbons, Oliver Hart, Bengt Holmström, Patrick Rey, Lars Stole, Jean Tirole, Philippe Weil, and numerous seminar participants for comments on earlier drafts. †ECARES, Université Libre de Bruxelles; ECORE (the recently created association between CORE and ECARES); and CEPR. I thank the financial support of the European Commission (RTN 2002-00224 “Competition Policy in International Markets” ) and of the Communauté Française de Belgique (ARC 00/05-252). ‡Boston University and CEPR