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Influence costs and hierarchy

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Author Info
Roman Inderst ()
Holger Müller ()
Karl Wärneryd ()

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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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File URL: http://hdl.handle.net/10.1007/s10101-004-0084-8
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Publisher 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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  1. Matthias Kräkel, 2006. "On the “Adverse Selection” of Organizations," Bonn Econ Discussion Papers bgse15_2006, University of Bonn, Germany. [Downloadable!]
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  2. Marco Delmastro, 2002. "On the choice of incentives in firms: influence activity, monitoring technology and organizational structure," Economics Bulletin, Economics Bulletin, vol. 12, pages 1-13. [Downloadable!]
  3. Robert Dur & Hein Roelfsema, 2007. "Social Exchange and Common Agency in Organizations," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  4. Felix Höffler & Sebastian Kranz, 2007. "Imperfect Legal Unbundling of Monopolistic Bottlenecks," Bonn Econ Discussion Papers bgse16_2007, University of Bonn, Germany. [Downloadable!]
  5. 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. [Downloadable!]
  6. Johannes Münster, 2009. "Group contest success functions," Economic Theory, Springer, vol. 41(2), pages 345-357, November. [Downloadable!] (restricted)
  7. Matthias Kräkel, 2006. "Firm Size, Economic Situation and Influence Activities," Discussion Papers 167, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  8. Fu, Qiang & Lu, Jingfeng, 2006. "The beauty of "bigness" in contest design: merging or splitting?," MPRA Paper 947, University Library of Munich, Germany. [Downloadable!]
  9. Oliver Gürtler, 2006. "Haggling for Rents, Relational Contracts, and the Theory of the Firm," Discussion Papers 169, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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