Annals of Finance

, Volume 4, Issue 4, pp 481–503 | Cite as

Technology driven organizational structure of the firm

Open Access
Research Article

Abstract

We model a corporate firm with a variable internal organizational structure that adapts to various degrees of technological cooperation. The entrepreneur determines the organizational structure that maximizes profits under participation constraints. Wages are determined by an internal cooperative pay-system, constrained by external reservation wages. We show that closer cooperation between production-workers results in a shorter organization with enhanced positional wages relative to the external benchmarks. The corporate firm is embedded in a competitive market economy that determines reservation wages and market prices. We also allow for more general technologies and provide conditions guaranteeing a finite optimal size of the firm.

Keywords

Hierarchy Organization of the firm Cooperative production Optimal firm size Positional wages Pay-system Labor complementarity 

JEL Classification

D23 J24 L22 

References

  1. 1.
    Alchian A.A. and Demsetz H. (1972). Production, information costs and economic organization. Am Econ Rev 62: 777–795 Google Scholar
  2. 2.
    Akerlof G. (1984). Gift exchange and efficiency wage theory: four views. Am Econ Rev Proc 74: 79–83 Google Scholar
  3. 3.
    Baker G., Gibbons R. and Murphy K.J. (2002). Relational contracts and the theory of the firm. Q J Econ 117: 39–84 CrossRefGoogle Scholar
  4. 4.
    Baron J.N. and Kreps D.M. (1999). Strategic Human Resources. Wiley, New York Google Scholar
  5. 5.
    Bolton P. and Dewatripont M. (1994). The firm as a communication network. Q J Econ 109: 809–839 CrossRefGoogle Scholar
  6. 6.
    Coleman J.S. (1980). Authority systems. Public Opin Q 44: 143–163 CrossRefGoogle Scholar
  7. 7.
    Everett M.G. and Borgatti S.P. (1991). Role coloring a graph. Math Soc Sci 26: 183–188 CrossRefGoogle Scholar
  8. 8.
    Garicano L. (2000). Hierarchies and the organization of knowledge in production. J Polit Econ 108: 874–904 CrossRefGoogle Scholar
  9. 9.
    Gilles R.P., Owen G. and Van den Brink R. (1992). Games with permission structures: the conjunctive approach. Int J Game Theory 20: 277–293 CrossRefGoogle Scholar
  10. 10.
    Gordon, D.M.: Bosses of different stripes: a cross-national perspective on monitoring and supervision. The American Economic Review, AEA Papers and Proceedings, pp. 375–379 (1994)Google Scholar
  11. 11.
    Grossman S.J. and Hart O.D. (1986). The costs and benefits of ownership: a theory of vertical and lateral integration. J Polit Econ 94: 691–719 CrossRefGoogle Scholar
  12. 12.
    Harsanyi J.C. (1959). A bargaining model for cooperative n-person games. In: Tucker, A.W. and Luce, R.D. (eds) Contributions to the theory of games IV, pp 325–355. Princeton UP, Princeton Google Scholar
  13. 13.
    Hart O. and Moore J. (1990). Property rights and the nature of the firm. J Polit Econ 98: 1119–1158 CrossRefGoogle Scholar
  14. 14.
    Hart O. and Moore J. (1999). Foundations of incomplete contracts. Rev Econ Stud 66: 115–138 CrossRefGoogle Scholar
  15. 15.
    Ichiishi T. (1993). The cooperative nature of the firm. Cambridge University Press, Cambridge Google Scholar
  16. 16.
    Joosten, R.: Dynamics, equilibria and values. Dissertation, Maastricht University, Maastricht (1996)Google Scholar
  17. 17.
    Keren M. and Levhari D. (1979). The optimum span of control in a pure hierarchy. Manage Sci 25: 1162–1172 CrossRefGoogle Scholar
  18. 18.
    Keren M. and Levhari D. (1983). The internal organization of the firm and the shape of average costs. Bell J Econ 14: 474–486 CrossRefGoogle Scholar
  19. 19.
    Maskin E. and Tirole J. (1999). Unforeseen contingencies and incomplete contracts. Rev Econ Stud 66: 83–114 CrossRefGoogle Scholar
  20. 20.
    Milgrom P. and Roberts J. (1994). The economics of modern manufacturing: technology, strategy and organization. Am Econ Rev 80: 511–528 Google Scholar
  21. 21.
    Pekec A. and Roberts F.S. (2001). The role assignment model nearly fits most social networks. Math Soc Sci 41: 275–293 CrossRefGoogle Scholar
  22. 22.
    Qian Y. (1994). Incentives and loss of control in an optimal hierarchy. Rev Econ Stud 61: 527–544 CrossRefGoogle Scholar
  23. 23.
    Radner R. (1992). Hierarchy: the economics of managing. J Econ Lit 30: 1382–1415 Google Scholar
  24. 24.
    Rajan R.G. and Zingales L. (1998). Power in a theory of the firm. Q J Econ 113: 387–432 CrossRefGoogle Scholar
  25. 25.
    Rajan R.G. and Zingales L. (2001). The firm as a dedicated hierarchy: A theory of the origins and growth of firms. Q J Econ 116: 805–851 CrossRefGoogle Scholar
  26. 26.
    Rosen S. (1982). Authority, control and the distribution of earnings. Bell J Econ 13: 311–323 CrossRefGoogle Scholar
  27. 27.
    Ruys P.H.M. and Van den Brink R. (1999). Positional abilities and rents on equilibrium wages and profits. In: Herings, J.J. and Talman, A.J.J. (eds) The Theory of Markets, pp 261–279. North-Holland, Amsterdam Google Scholar
  28. 28.
    Ruys P.H.M., Semenov R. and Van den Brink R. (2000). Values and governance systems. In: Ménard, C. (eds) Institutions, Contracts, Organizations: Perspectives from New Institutional Economics, pp 422–445. Edward Elgar Publishing Co, Northampton Google Scholar
  29. 29.
    Shapley L.S. (1953). A value for n-person games. In: Kuhn, H.W. and Tucker, A.W. (eds) Annals of Mathematics Studies 28 (Contributions to the Theory of Games Vol. 2), pp 307–317. Princeton UP, Princeton Google Scholar
  30. 30.
    Simon H. (1991). Organizations and markets. J Econ Perspect 5: 25–44 Google Scholar
  31. 31.
    Stiglitz J. (1976). The efficiency wage hypothesis, surplus labour and the distribution of income in L.D.C’s. Oxford Econ Papers 28: 185–207 Google Scholar
  32. 32.
    Teece D.J. (1996). Firm organization, industrial structure and technological innovation. J Econ Behav Organ 31: 193–224 CrossRefGoogle Scholar
  33. 33.
    Van den Brink R. (1997). An axiomatization of the disjunctive permission value for games with a permission structure. Int J Game Theory 26: 27–43 CrossRefGoogle Scholar
  34. 34.
    van den Brink, R.: Vertical wage differences in hierarchically structured firms. Social Choice and Welfare. doi:10.1007/s00355-007-0230-7 (2007)
  35. 35.
    Gilles R.P. and Brink R. (1996). Axiomatizations of the conjunctive permission value for games with permission structures. Games Econ Behav 12: 113–126 CrossRefGoogle Scholar
  36. 36.
    van den Brink, R., Gilles, R.P.: Explicit and latent authority in hierarchical organizations. Tinbergen Discussion paper 03-102/1, Free University, Amsterdam (2003)Google Scholar
  37. 37.
    Williamson O.E. (1967). Hierarchical control and optimum firm level. J Polit Econ 75: 123–138 CrossRefGoogle Scholar
  38. 38.
    Yellen J.L. (1984). Efficiency wage models of unemployment. Am Econ Rev Proc 74: 200–205 Google Scholar

Copyright information

© Springer-Verlag 2007

Authors and Affiliations

  1. 1.Department of Econometrics, Tinbergen InstituteFree UniversityAmsterdamThe Netherlands
  2. 2.Department of Econometrics and OR, CentER and TILECTilburg UniversityTilburgThe Netherlands

Personalised recommendations