Influence Costs and Hierarchy

Roman Inderst, Holger M. Müller () and Karl Wärneryd
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Holger M. Müller: Department of Economics, University of Mannheim, Postal: A5, Room A237, 68131 Mannheim, Germany

No 00-30, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

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 1920's 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.

Pages: 27 pages
Date: 2000-06-21
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, is gratefully acknowledged.
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Journal Article: Influence costs and hierarchy (2005)
Working Paper: Influence Costs and Hierarchy (2000)
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