The Growth of Hierarchy in Organizations: Managing Knowledge Scope

Abstract

Theory posits hierarchy as a response to coordination challenges and emphasizes organization
size and the need to transfer knowledge between people as the mainspring of these challenges.
Building on the knowledge-based view, we propose that knowledge scope—the variety of
knowledge across an organization’s members—also affects coordination costs and therefore the
use of hierarchy. Using an economy-wide database from Brazil, we show that firms are more
likely to expand their hierarchy when knowledge scope increases. This effect varies with firms’
capacities to manage knowledge; firms whose employees perform more similar tasks or have
shared experience at previous employers are less likely to expand hierarchy in response to
increases in knowledge scope. We reveal knowledge scope to be an understudied determinant of
organizational hierarchy.

Keywords: organizational structure, hierarchy, knowledge scope, knowledge-based view, new ventures

JEL Classification: M10, D20, M13