Delay Cost, Knowledge Hierarchy, and Wages

We provide a new approach to study optimal design of knowl- edge hierarchies under general assumptions. When problem-solving be- comes more urgent, employees at each level solve more complex problems and earn more. The organization structure becomes flatter, with fewer lay- ers but a larger span of control at each layer. Moreover, knowledge ac- quisition is disproportionately concentrated among lower level employees, which results in shrinking intra-firm wage differentials across layers. We find that labor productivity of the firm increases after delay becomes more costly, despite the direct output loss due to greater delay. Using Colom- bia plant-level data, we find that exporting firms—which face higher delay cost—have fewer layers, larger span of control, and pay higher wages at all levels.