The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms
Raghuram G. Rajan
University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of Chicago - Polsky Center for Entrepreneurship; European Corporate Governance Institute (ECGI)
November 9, 1998
In the formative stages of their businesses, entrepreneurs have 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 determines the organization'sinternal structure, growth,anditseventualsize. Large, steep hierarchies will predominate in physical-capital in-tensive industries, and will have seniority-based promotion policies. By contrast, at hierarchies will prevail in human-capital intensive industries and will have up-or-out promotion systems. Furthermore, at hierarchies will have more distinctive technologies or cultures than steep hierarchies. The model points to some essential differences between organized hierarchies and markets.
Number of Pages in PDF File: 62
JEL Classification: D23, L22
Date posted: November 16, 1998
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