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Influence costs and hierarchy

Author

Listed:
  • Roman Inderst
  • Holger Müller
  • Karl Wärneryd

Abstract

In an internal capital market, individual departments may compete for a share of the firm’s budget by engaging in wasteful influence activities. We show that firms with more levels of hierarchy may experience lower influence costs than less hierarchical firms, even though the former provide more opportunities for exerting influence. The unique influence-cost minimizing hierarchy is strongly asymmetric. With a linear production technology this is also the optimal hierarchy. If individual departments have different productivities, however, and the production technology exhibits decreasing returns to scale, a symmetric hierarchy that does not minimize influence costs may be optimal. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Roman Inderst & Holger Müller & Karl Wärneryd, 2005. "Influence costs and hierarchy," Economics of Governance, Springer, vol. 6(2), pages 177-197, July.
    • Handle: RePEc:spr:ecogov:v:6:y:2005:i:2:p:177-197
    DOI: 10.1007/s10101-004-0084-8
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    Citations

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    Cited by:

    1. Dur, Robert & Roelfsema, Hein, 2010. "Social exchange and common agency in organizations," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(1), pages 55-63, January.
    2. repec:elg:eechap:15325_7 is not listed on IDEAS
    3. Yildirim, Mustafa, 2019. "Optimal team size under legislative bargaining with costly recognition," Economics Letters, Elsevier, vol. 177(C), pages 81-84.
    4. Cordella, Antonio & Cordella, Tito, 2017. "Motivations, monitoring technologies, and pay for performance," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 236-255.
    5. Fu, Qiang & Lu, Jingfeng, 2009. "The beauty of "bigness": On optimal design of multi-winner contests," Games and Economic Behavior, Elsevier, vol. 66(1), pages 146-161, May.
    6. Kräkel, Matthias, 2006. "On the "Adverse Selection" of Organizations," Bonn Econ Discussion Papers 15/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    7. Ivo Bischoff & Frédéric Blaeschke, 2013. "Incentives and Influence Activities in the Public Sector: the Trade-off in Performance Budgeting and Conditional Grants," MAGKS Papers on Economics 201320, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    8. Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," IZA Discussion Papers 2391, Institute of Labor Economics (IZA).
    9. Oliver Gürtler, 2010. "Haggling for Rents, Relational Contracts, and the Theory of the Firm," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 62(4), pages 359-377, October.
    10. Wulf, Julie, 2009. "Influence and inefficiency in the internal capital market," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 305-321, October.
    11. Brice Corgnet & Ludivine Martin & Peguy Ndodjang & Angela Sutan, 2015. "On the Merit of Equal Pay: When Influence Activities Interact with Incentive Setting," Working Papers 15-09, Chapman University, Economic Science Institute.
    12. Cedomir Ljubojevic & Gordana Ljubojevic & Nina Maksimovic, 2013. "Corporate Governance and Competitive Capability in Serbian Companies," MIC 2013: Industry, Science and Policy Makers for Sustainable Future; Proceedings of the 14th International Conference, Koper, 21–23 November 2013 [Selected Papers],, University of Primorska, Faculty of Management Koper.
    13. Inderst, Roman & Muller, Holger M. & Warneryd, Karl, 2007. "Distributional conflict in organizations," European Economic Review, Elsevier, vol. 51(2), pages 385-402, February.
    14. repec:ebl:ecbull:v:12:y:2002:i:2:p:1-13 is not listed on IDEAS
    15. Szu-Wen Chou, 2002. "Flattened Resource Allocation, Hierarch Design and the Boundaries of the Firm," Levine's Working Paper Archive 618897000000000056, David K. Levine.
    16. Wärneryd, Karl, 2014. "Rent Seeking and Organizational Structure," SSE/EFI Working Paper Series in Economics and Finance 749, Stockholm School of Economics.
    17. Johannes Münster, 2009. "Group contest success functions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 41(2), pages 345-357, November.
    18. Warneryd, Karl, 2001. "Replicating contests," Economics Letters, Elsevier, vol. 71(3), pages 323-327, June.
    19. repec:elg:eechap:15325_6 is not listed on IDEAS
    20. Fu, Qiang & Lu, Jingfeng, 2006. "The beauty of "bigness" in contest design: merging or splitting?," MPRA Paper 947, University Library of Munich, Germany.

    More about this item

    Keywords

    Hierarchies; influence activities; internal capital markets;
    All these keywords.

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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