FIN-02-010 |
NYU Stern School of Business |
February 2002
Roman Inderst, Holger M. Mueller and Karl Warneryd
ABSTRACT
Hierarchy can function as an instrument to channel influence activities or power struggles in organizations. Contrary to what has frequently been argued, we show that multi-divisional organizations may involve lower influence costs than single-tier organizations, even though they offer more scope for organizational conflict and have more executives that can be influenced. These benefits derive from two effects. First, part of the conflict in multi-divisional organizations takes place on the division level, where a small number of agents fight over only a fraction of the overall prize. Second, by grouping agents into common divisions, multidivisional organizations create free-rider problems in rent-seeking. We apply our framework to divestitures and the transition from the U- to the M-form by US corporations in the 1920s.
Classification: C72, D74, G31, G34.
Roman Inderst
Institution: Department of Economics & Department of Accounting and Finance, London School of Economics, Houghton Street, London WC2A 2AE.
Email: r.inderst@lse.ac.uk
Holger H. Mueller
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0279
Fax: (212) 995-4233
Email: hmueller@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~hmueller
Karl Warneryd
Institution: Department of Economics, Stockholm School of Economics, Box 6501, S-113 83 Stockholm, Sweden.
Email: Karl.Warneryd@hhs.se
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