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Integration, Organizational Processes and Allocation of Resources Oguzhan Ozbas∗ February 2004 Abstract Does the level of integration of a firm affect the quality of information available to its top decision makers responsible for allocating resources? Motivated by the pervasiveness of specific knowledge in large multi-division firms, I develop a model of internal competition for corporate resources among specialist managers and show that: (i) managers of integrated firms exaggerate the payoffs of their projects to obtain resources despite potentially adverse career consequences, and (ii) the exaggeration problem worsens with increased integration and reduces the allocative efficiency of an integrated firm. Control rights based on asset ownership enable the firm to set “the rules of the game” and improve managerial behavior through organizational processes such as rigid capital budgets, job rotation, centralization and hierarchies. ∗Marshall School of Business, University of Southern California. I am grateful to my advisors Sendhil Mul- lainathan, David Scharfstein (Chairman) and Antoinette Schoar for their encouragement, thoughtful advice and many helpful discussions throughout my dissertation. I thank an anonymous referee, Harry DeAngelo, Linda DeAn- gelo, John Matsusaka and Ján Zábojník for their comments. I also have benefited from the comments of Bob Gibbons, Tom Gilligan, Denis Gromb, Bengt Holmström, Kose John, Simon Johnson, Tony Marino, Kevin Murphy, Jeremy Stein, Jean Tirole, Eric Van den Steen, Andrew von Nordenflycht, Mark Westerfield, and seminar participants at the 2003 NBER Organizational Economics Program, 2004 AFA Meetings, HBS, MIT, University of Illi