Incentives, Scale Economies, and Organizational Form

Posted: 19 Sep 1997

See all articles by Eric Maskin

Eric Maskin

Princeton University - Department of Economics; Harvard University - Department of Economics; Massachusetts Institute of Technology (MIT) - Department of Economics

Yingyi Qian

Tsinghua University - School of Economics & Management; Centre for Economic Policy Research (CEPR)

Chenggang Xu

University of Hong Kong

Date Written: May 1997

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 (multi-divisional 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.

JEL Classification: D23

Suggested Citation

Maskin, Eric S. and Qian, Yingyi and Xu, Chenggang, Incentives, Scale Economies, and Organizational Form (May 1997). Available at SSRN: https://ssrn.com/abstract=11086

Eric S. Maskin (Contact Author)

Princeton University - Department of Economics ( email )

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Yingyi Qian

Tsinghua University - School of Economics & Management

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China

Centre for Economic Policy Research (CEPR)

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United Kingdom

Chenggang Xu

University of Hong Kong ( email )

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Hong Kong, Pokfulam HK
China

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