How Organizational Hierarchy Affects Information Production

Abstract

We exploit a variation in organizational hierarchy induced by a reorganization plan implemented in roughly 2,000 bank branches in India, to investigate how organizational hierarchy affects the allocation of credit. We find that increased hierarchization of a branch induces credit rationing, reduces the performance on loans, and generates standardization in loan contracts. Additionally, we find that hierarchical structures perform better in environments characterized by a high degree of corruption, highlighting the benefits of hierarchies in restraining rent seeking activities. Overall, our results are consistent with the view that valuable information may be lost in hierarchical structures.

Keywords: Hierarchies, Information, Banks, Credit

JEL Classification: D21, D83, G21, G30