Incentives, Scale Economies, and Organizational Form

Eric Maskin, Yingyi Quan and Chenggang Xu

No 51, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: We model organization as the command-and-communication network of managers erected on top of technology (which is modeled as a collection of plants). In our framework, the role of a manager is to deal with shocks that affect the plants that he oversees directly or indirectly. Organizational form is then an instrument for (a) economizing on managerial costs, and (b) providing managerial incentives. We show that two particular organizational forms, the M-form (multidivisional form) and the U-form (unitary form), are the optimal structures when shocks are sufficiently "big." We argue however that, under certain empirical assumptions, the M-form is likely to be strictly preferable once incentives are taken into account. We conclude by showing that the empirical hypotheses on which this comparison rests are satisfied for Chinese data.

Keywords: organizational reform; scale economies; incentives; yardstick competition; China (search for similar items in EconPapers)
Pages: pages
Date: 1997-05-01
New Economics Papers: this item is included in nep-mic
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Working Paper: Incentives, Scale Economies and Organizational Form (1997)
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