Firm Hierarchies and Misallocation

Matthias Kehrig and Shipeng Fu

No 21150, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how internal hierarchies affect productivity, wages, and labor shares in Chinese manufacturing firms. Using detailed information on professional titles from the 2004 Annual Survey of Industrial Production, we construct firm-level measures of hierarchical structure and compare private firms with state-owned enterprises (SOEs). Private firms operate leaner hierarchies and exhibit rising labor productivity as organizational layers expand. In contrast, SOEs adopt prematurely deep and top-heavy hierarchies associated with declining labor productivity but higher wages. As a result, labor shares are substantially higher in SOEs. Counterfactual exercises show that distortions in hiring and organizational design account for a large fraction of the labor share gap between SOEs and private firms, pointing to inefficient internal organization as an important source of aggregate misallocation.

Keywords: Organizational structure; State-owned enterprises; Misallocation; Labor productivity; Labor share; China (search for similar items in EconPapers)
JEL-codes: D24 L22 L25 O47 (search for similar items in EconPapers)
Date: 2026-02
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