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Abstract

We model a firm in an institutional market setting, consisting of a production technology and its governance. The governance consists of a hierarchical firm structure, a cost efficiency parameter,and an internal pay system. The depth of the firm is determined by profit maximization under the participation restriction that lowest wages meet reservation wages. Reservation wages are endogenously determined in the institutional market economy. We give conditions guaranteeing a finite optimal firm size. Using CES-production technologies we illustrate how firm size depends on labor substitutability, and show that a linear technology yields the deepest structure and a complementary the flattest structure.

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File URL: http://papers.tinbergen.nl/05020.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-020/1.

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Date of creation: 14 Feb 2005
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Handle: RePEc:dgr:uvatin:20050020

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Web page: http://www.tinbergen.nl

Related research

Keywords: Optimal firm size; governance; hierarchy; internal organization structure; cooperative game; permission value; labor substitutability; general equilibrium;

Find related papers by JEL classification:

• D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
• J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
• L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

References

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10. Michael Keren & David Levhari, 1979. "The Optimum Span of Control in a Pure Hierarchy," Management Science, INFORMS, vol. 25(11), pages 1162-1172, November.
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Cited by:

1. Ruys, P.H.M., 2005. "The Governance of Services," Discussion Paper 2005-102, Tilburg University, Center for Economic Research.
   
   • Ruys, P.H.M., 2005. "The Governance of Services," Discussion Paper 2005-024, Tilburg University, Tilburg Law and Economic Center.

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