The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms

Raghuram Rajan and Luigi Zingales

No 7546, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A fundamental problem entrepreneurs face in the formative stages of their businesses is how to provide incentives for employees to protect, rather than steal, the source of organizational rents. We study how the entrepreneur's response to this problem will determine the organization's internal structure, growth, and its eventual size. In particular, our model suggests large, steep hierarchies will predominate in physical capital intensive industries, and these will typically have seniority-based promotion policies. By contrast, flat hierarchies will be seen in human capital intensive industries. These will have up-or-out promotion systems, where experienced managers either become owners or are fired. Furthermore, flat hierarchies will have more distinctive technologies or cultures than steep hierarchies. The model points to some essential differences between organized hierarchies and markets.

JEL-codes: D23 I22 (search for similar items in EconPapers)
Date: 2000-02
New Economics Papers: this item is included in nep-ind, nep-ino, nep-mic and nep-tid
Note: CF
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Citations: View citations in EconPapers (28)

Published as Rajan, Raghuram G. and Luigi Zingales. "The Firm As A Dedicated Hierarchy: A Theory Of The Origins And Growth Of Firms," Quarterly Journal of Economics, 2001, v116(3,Aug), 805-851.

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Journal Article: The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms (2001)
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