This paper analyzes the internal divisional structure within an
organization in the framework of incomplete contract theory. We use
the framework of citet{at1997} and define the managerial control
structure as “sequence of search”. A key feature of this paper
which differentiate it from other works in the literature is that we add
an emph{ex post} bargaining phase in which the managers can agree on
the project which maximize their joint private benefit. Our model shows
the share of cooperative surplus the managers can get from bargaining
and their default pay off plays a key role in determining their search
effort. When there is no spill over effect between the agents’ effort,
internal separation is always dominated by internal integration with
control right assigned to the agent (manager) with high interest
congruence with the principal (head quarter). When there are dissonance
effect during integration, the principal want to have separation to
avoid it. But more importantly, the optimal divisional structure depends
heavily on whether the bargaining is interest congruence enhancing
(increase the interest congruence between agents and the principal) or
destroying (decrease the interest congruence).