Corporate Hierarchies and the Size of Nations: Theory and Evidence
Ludwig-Maximilians-Universität Munich - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)
Paris School of Economics (PSE); Delta - Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)
NYU Working Paper No. 2451/26044
Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and Germancorporations. The larger country (Germany) has larger firms with flatter more decentral corporate hierarchies compared to thesmaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegatingpower to lower levels of the corporation. We develop a theory which explains these facts and which links these features to the tradeenvironment that countries and firms face. We introduce firms with internal hierarchies in a Krugman (1980) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms which eventually leads to decentralized corporate hierarchies. We offer econometric evidence which is consistent with the models predictions.
Number of Pages in PDF File: 48
Keywords: international trade with endogenous firm organizations, trade and corporate organization in similar countries, power struggle in the firm, corporate organization in Austria and Germany, empirical test of the theory of the firmworking papers series
Date posted: October 13, 2008
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