Working Paper: CEPR ID: DP6734
Authors: Dalia Marin; Thierry Verdier
Abstract: Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and German corporations. The larger country (Germany) has larger firms with flatter and more decentralized corporate hierarchies compared to the smaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegating power to lower levels of the corporation. We develop a theory, which explains these facts and which links these features to the trade environment that countries and firms face. We introduce firms with internal hierarchies in a Krugman(1980) cum Melitz and Ottaviano (2007) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms, which eventually leads to decentralized corporate hierarchies. We offer empirical evidence, which is consistent with the models predictions.
Keywords: corporate organization; international trade; endogenous firm organizations
JEL Codes: D23; F12; F14; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger countries (R12) | Larger firms (L25) |
| Larger firms (L25) | Flatter and more decentralized corporate hierarchies (L22) |
| Competition levels (L13) | Internal power struggle within firms (L22) |
| Internal power struggle within firms (L22) | Shift towards decentralized corporate hierarchies (L22) |
| Increased trade exposure (F19) | Less hierarchical structures (L22) |
| Country size (R12) | Internal power allocation within firms (D22) |