The Creation of A Middle‐Management Level by Entrepreneurial Ventures: Testing Economic Theories of Organizational Design

Why do some entrepreneurial ventures rapidly switch from flat organizations composed of owner‐managers and line workers to deeper organizations that also include a middle‐management level? The aim of this paper is to investigate this issue and to test the predictions of different streams of the theoretical economic literature on organizational design. We use the estimates of survival data analysis models to examine the determinants of the addition of a middle‐management level to the corporate hierarchy of a large sample of Italian high‐tech entrepreneurial ventures. The econometric results lend support to the view proposed by the “information processing” stream that the information overload problems engendered by a highly competitive and unpredictable business environment are key drivers of the creation of a middle‐management level. Moreover, in accordance with the “knowledge hierarchy” literature, the greater the human capital of firms’ owner‐managers, the more likely the appointment of a middle manager. Conversely, we fail to provide evidence consistent with theoretical predictions inspired by the “decentralization of incentives” stream. Lastly, transaction costs and adverse selection problems in the managerial labour market are found to have a large negative effect on the likelihood of the appointment of middle managers.