Influence costs and hierarchy
AbstractIn 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 InfoArticle provided by Springer in its journal Economics of Governance.
Volume (Year): 6 (2005)
Issue (Month): 2 (07)
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- Inderst, Roman & Müller, Holger M. & Wärneryd, Karl, 2000. "Influence Costs and Hierarchy," Sonderforschungsbereich 504 Publications 00-30, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Inderst, Roman & Müller, Holger M. & Wärneryd, Karl, 2000. "Influence Costs and Hierarchy," Working Paper Series in Economics and Finance 392, Stockholm School of Economics.
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- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
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