Working Paper: CEPR ID: DP7253
Authors: Maria Guadalupe; Julie Wulf
Abstract: This paper establishes a causal effect of product market competition on various characteristics of organizational design. Using a unique panel dataset on firm hierarchies of large U.S. firms (1986-1999) and a quasi-natural experiment (trade liberalization), we find that increasing competition leads firms to flatten their hierarchies, i.e., (i) firms reduce the number of positions between the CEO and division managers and (ii) increase the number of positions reporting directly to the CEO (span of control). Firms also alter the structure and level of division manager compensation, increasing total pay as well as local (division-level) and global (firm-level) incentives. Our estimates show that for the average firm, span of control increased by 6% and depth decreased by 11% as a result of the quasi-natural experiment.
Keywords: competition; complementarities; decentralization; hierarchy; incentives; organizational change; organizational structure; performance related pay
JEL Codes: L2; M2; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased product market competition (L19) | flattening of hierarchies (L22) |
| increased product market competition (L19) | adjustments in compensation structures (M52) |
| larger tariff reductions (F13) | increased product market competition (L19) |
| increased product market competition (L19) | increased span of control for CEOs (M12) |