The Rol of the Manager in the Theory of the Firm

This study develops a theory of the rm in which the knowledge distribution of the manager plays a key role. First, some important determinants of the optimal knowledge distribution are identied. Both the relative importance of the task and the observability of the task appear to be relevant. Second, building on these insights, the make-or-buy decision is studied. There exists a trade-o between transaction cost when outsourcing a task and informational rent when supervising employees. It is never optimal to outsource a task if there is a less important task not outsourced. When transaction costs go down, more tasks get outsourced.