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Corporate Hierarchies and the Size of Nations: Theory and Evidence

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  • Marin, Dalia
  • Verdier, Thierry

Abstract

Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and German corporations. The larger country (Germany) has larger firms with flatter and more decentralized corporate hierarchies compared to the smaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegating power to lower levels of the corporation. We develop a theory, which explains these facts and which links these features to the trade environment that countries and firms face. We introduce firms with internal hierarchies in a Krugman(1980) cum Melitz and Ottaviano (2007) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms, which eventually leads to decentralized corporate hierarchies. We offer empirical evidence, which is consistent with the models predictions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6734.

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Date of creation: Mar 2008
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Handle: RePEc:cpr:ceprdp:6734

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Related research

Keywords: corporate organization in similar countries; empirical test of the theory of the firm; endogenous congruence in the firm; international trade with endogenous firm organizations;

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References

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  1. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, American Finance Association, vol. 55(1), pages 35-80, 02.
  2. Marin, Dalia, 2006. "A New International Division of Labour in Europe: Outsourcing and Offshoring to Eastern Europe," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5447, C.E.P.R. Discussion Papers.
  3. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," Development Working Papers 201, Centro Studi Luca d\'Agliano, University of Milano.
  4. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Harvard Institute of Economic Research Working Papers 2118, Harvard - Institute of Economic Research.
  5. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  7. Nick Bloom & John Van Reenen, 2006. "Measuring and explaining management practices across firms and countries," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 733, London School of Economics and Political Science, LSE Library.
  8. Marin, Dalia & Verdier, Thierry, 2003. "Globalization and the Empowerment of Talent," Discussion Papers in Economics 268, University of Munich, Department of Economics.
  9. Dalia Marin & Thierry Verdier, 2003. "Globalization and the "New Entreprise"," DELTA Working Papers, DELTA (Ecole normale supérieure) 2003-31, DELTA (Ecole normale supérieure).
  10. Marin, Dalia & Verdier, Thierry, 2007. "Competing in Organizations: Firm Heterogeneity and International Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6342, C.E.P.R. Discussion Papers.
  11. Dalia Marin & Thierry Verdier, 2008. "Power Inside The Firm and The Market: A General Equilibrium Approach," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(4), pages 752-788, 06.
  12. Raghuram G. Rajan & Julie Wulf, 2006. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 759-773, November.
  13. Patrick Bolton & David S. Scharfstein, 1998. "Corporate Finance, the Theory of the Firm, and Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 95-114, Fall.
  14. Barbara J. Spencer, 2005. "International Outsourcing and Incomplete Contracts," NBER Working Papers 11418, National Bureau of Economic Research, Inc.
  15. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  16. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  17. Bengt Holmstrom & Steven N. Kaplan, 2001. "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 121-144, Spring.
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