Efficient hierarchies: Equivalence under differing employment regimes

A major criticism of the information processing hierarchy model of management structure pioneered by Radner and Van Zandt is that it is unrealistic in its description of labor. This paper shows how the existing model can be extended to use labor hours instead of just the number of people employed. This allows the analysis of hierarchies to include realistic employment regimes such as salaries and piece rates. The sets of efficient hierarchies under these new, more realistic employment regimes are derived. Surprisingly, it is shown that equivalences hold between some of these new sets. This new approach using hours as well as the number of employees has empirical implications, with hours growing at a faster rate than employees as a firm grows. The final section of the paper extends the existing information processing model to include the possibility that people can be unreliable. In particular people can make mistakes in the tasks they are assigned, or they can be late in reporting the result of their processing. These reliability concepts are developed here for choosing amongst sets of efficient hierarchies. They also suggest how incentive considerations can be introduced into the information processing model.