Working Paper: CEPR ID: DP3315
Authors: Roman Inderst; Holger M. Müller; Karl Warneryd
Abstract: Hierarchy can function as an instrument to channel influence activities or power struggles in organizations. Contrary to what has frequently been argued, we show that multi-divisional organizations may involve lower influence costs than single-tier organizations, even though they offer more scope for organizational conflict and have more executives that can be influenced. These benefits derive from two effects. First, part of the conflict in multi-divisional organizations takes place on the division level, where a small number of agents fight over only a fraction of the overall prize. Second, by grouping agents into common divisions, multi-divisional organizations create free-rider problems in rent seeking. We apply our framework to divestitures and the transition from the U- to the M-form by US corporations in the 1920s.
Keywords: conflict; hierarchy; influence activities; U-form; M-form
JEL Codes: C72; D74; G31; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| multidivisional organizations (L22) | lower influence costs (G19) |
| division of conflict (D74) | lower influence costs (G19) |
| intra-division contests (Y80) | lower influence costs (G19) |
| grouping agents into divisions (L00) | freerider problems in rent-seeking activities (D72) |
| divisionalization (L23) | reduction in rent-seeking expenditure (D72) |