A Lab Experiment on Knowledge Hierarchy Formation

Abstract

The way in which hierarchies form and are sustained has been little studied in the lab, yet is vital to our understanding of the real world formation of organisations and firms. We specify a simple model of hierarchy formation in which participants can share tasks within an organisation at a cost. We then proceed to conduct a lab experiment in which this cost is exogenously varied.We find that participants are sensitive to the incentives to form (or not to form) groups, but exhibit a strong preference for togetherness. Moreover, participants are strongly discouraged from trying to join groups if they have been (exogenously) rejected in the past, suggesting that disappointment is a factor in their decision-making.

Keywords: Experimental Economics, Hierarchies, Theory of the firm