Managerial Firms, Taxation, and Welfare

This paper investigates welfare properties of an economy where firms are managerial, i.e., composed of two complementary units, each run by its own manager. We show that welfare outcomes depend on the interplay between the set of private costs and benefits that are associated with the coordination of operating decisions inside the firm. We also derive a number of interesting results regarding the welfare effects of taxation, which depend on market conditions, tax levels, and structure of managerial incentives. In some cases, these welfare effects are due to »tax-induced« changes in the ownership structure of firms in the industry equilibrium.