Influence Costs and Hierarchy

Roman Inderst, Holger M. Müller and Karl Wärneryd
Additional contact information
Holger M. Müller: Department of Economics, Postal: University of Mannheim, A5, DE-6831 Mannheim, Germany

No 392, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: In an internal capital market, individual departments may compete for a share of the firm´s budget by engaging in wasteful influence activities. We show that firms with more levels of hierarchy may experience lower influence costs than less hierarchical firms, even though the former provide more opportunities for exerting influence. We further argue that the widely discussed change from the U-form to the M-form organization in the 1920s may be related to attempts to limit divisional lobbying. In particular, we show that influence costs under the U-form organization are lower than under the M-form organization if and only if the firm's operations are sufficiently small.

Keywords: Hierarchies; influence activities; internal capital markets; U-form vs. M-form organization (search for similar items in EconPapers)
JEL-codes: D74 G31 G34 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2000-06-21
New Economics Papers: this item is included in nep-cdm, nep-cfn and nep-ind
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Influence costs and hierarchy (2005)
Working Paper: Influence Costs and Hierarchy (2000)
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