The Flattening Firm and Product Market Competition

53 Pages Posted: 15 Apr 2009

See all articles by Maria Guadalupe

Maria Guadalupe

Centre for Economic Policy Research (CEPR); INSEAD - Economics and Political Sciences; Institute for the Study of Labor (IZA)

Julie Wulf

Harvard Business School

Date Written: April 2009

Abstract

This paper establishes a causal effect of product market competition on various characteristics of organizational design. Using a unique panel dataset on firm hierarchies of large U.S. firms (1986-1999) and a quasi-natural experiment (trade liberalization), we find that increasing competition leads firms to flatten their hierarchies, i.e., (i) firms reduce the number of positions between the CEO and division managers and (ii) increase the number of positions reporting directly to the CEO (span of control). Firms also alter the structure and level of division manager compensation, increasing total pay as well as local (division-level) and global (firm-level) incentives. Our estimates show that for the average firm, span of control increased by 6% and depth decreased by 11% as a result of the quasi-natural experiment.

Keywords: competition, complementarities, decentralization, hierarchy, incentives, organizational change, organizational structure, performance-related pay

JEL Classification: L2, M2, M52

Suggested Citation

Guadalupe, Maria and Guadalupe, Maria and Wulf, Julie M., The Flattening Firm and Product Market Competition (April 2009). CEPR Discussion Paper No. DP7253, Available at SSRN: https://ssrn.com/abstract=1382749

Maria Guadalupe (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

INSEAD - Economics and Political Sciences ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Julie M. Wulf

Harvard Business School ( email )

Harvard Business School
Boston, MA
United States

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