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Influence costs and hierarchy

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Author Info

  • 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

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Bibliographic Info

Article provided by Springer in its journal Economics of Governance.

Volume (Year): 6 (2005)
Issue (Month): 2 (07)
Pages: 177-197

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Handle: RePEc:spr:ecogov:v:6:y:2005:i:2:p:177-197

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Related research

Keywords: Hierarchies; influence activities; internal capital markets;

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Cited by:
  1. Felix Höffler & Sebastian Kranz, 2007. "Imperfect Legal Unbundling of Monopolistic Bottlenecks," Bonn Econ Discussion Papers bgse16_2007, University of Bonn, Germany.
  2. Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," IZA Discussion Papers 2391, Institute for the Study of Labor (IZA).
  3. 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).
  4. Robert Dur & Hein Roelfsema, 2007. "Social Exchange and Common Agency in Organizations," CESifo Working Paper Series 2030, CESifo Group Munich.
  5. Warneryd, Karl, 2001. "Replicating contests," Economics Letters, Elsevier, vol. 71(3), pages 323-327, June.
  6. 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.
  7. Felix Höffler & Sebastian Kranz, 2007. "Legal Unbundling can be a Golden Mean between Vertical Integration and Separation," Bonn Econ Discussion Papers bgse15_2007, University of Bonn, Germany.
  8. Inderst, Roman & Mueller, Holger M & Wärneryd, Karl, 2002. "Distributional Conflict in Organisations," CEPR Discussion Papers 3315, C.E.P.R. Discussion Papers.
  9. Kräkel, Matthias, 2006. "On the "Adverse Selection" of Organizations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 168, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  10. repec:ebl:ecbull:v:12:y:2002:i:2:p:1-13 is not listed on IDEAS
  11. Wulf, Julie, 2009. "Influence and inefficiency in the internal capital market," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 305-321, October.
  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. Wärneryd, Karl, 2014. "Rent Seeking and Organizational Structure," Working Paper Series in Economics and Finance 749, Stockholm School of Economics.
  14. Fu, Qiang & Lu, Jingfeng, 2006. "The beauty of "bigness" in contest design: merging or splitting?," MPRA Paper 947, University Library of Munich, Germany.
  15. Johannes Münster, 2009. "Group contest success functions," Economic Theory, Springer, vol. 41(2), pages 345-357, November.

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