The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms

Rajan, Raghuram G.; Zingales, Luigi

doi:10.2139/ssrn.139707

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The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms

62 Pages Posted: 16 Nov 1998

See all articles by Raghuram G. Rajan

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

There are 2 versions of this paper

Date Written: November 9, 1998

Abstract

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.

JEL Classification: D23, L22

Suggested Citation: Suggested Citation

Rajan, Raghuram G. and Zingales, Luigi, The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms (November 9, 1998). Available at SSRN: https://ssrn.com/abstract=139707 or http://dx.doi.org/10.2139/ssrn.139707