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The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms

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  • Raghuram G. Rajan
  • Luigi Zingales

Abstract

In the formative stages of their businesses, entrepreneurs have to provide incentives for employees to protect, rather than steal, the source of organizational rents. We study how the entrepreneur's response to this problem determines the organization's internal structure, growth, and its eventual size. Large, steep hierarchies will predominate in physical-capital-intensive industries, and will have seniority-based promotion policies. By contrast, flat hierarchies will prevail in human-capital-intensive industries and will have up-or-out promotion systems. Furthermore, flat hierarchies will have more distinctive technologies or cultures than steep hierarchies. The model points to some essential differences between organized hierarchies and markets.

Suggested Citation

  • Raghuram G. Rajan & Luigi Zingales, 2001. "The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(3), pages 805-851.
    • Handle: RePEc:oup:qjecon:v:116:y:2001:i:3:p:805-851.
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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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