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Influence Costs and Hierarchy

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  • Inderst, Roman

    (Sonderforschungsbereich 504)

  • Müller, Holger M.

    (Department of Economics)

  • Wärneryd, Karl

    ()
    (Dept. of Economics, Stockholm School of Economics)

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. We further argue that the widely discussed change from the U-form to the M-form organization in the 1920s may be related to attempts to limit divisional lobbying. In particular, we show that influence costs under the U-form organization are lower than under the M-form organization if and only if the firm's operations are sufficiently small.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 392.

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Length: 27 pages
Date of creation: 21 Jun 2000
Date of revision:
Handle: RePEc:hhs:hastef:0392

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Keywords: Hierarchies; influence activities; internal capital markets; U-form vs. M-form organization;

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Cited by:
  1. Felix Höffler & Sebastian Kranz, 2007. "Legal Unbundling can be a Golden Mean between Vertical Integration and Separation," Bonn Econ Discussion Papers, University of Bonn, Germany bgse15_2007, University of Bonn, Germany.
  2. Dur, Robert & Roelfsema, Hein, 2010. "Social exchange and common agency in organizations," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 39(1), pages 55-63, January.
  3. Cedomir Ljubojevic & Gordana Ljubojevic & Nina Maksimovic, 2013. "Corporate Governance and Competitive Capability in Serbian Companies," MIC 2013: Industry, Science and Policy Makers for Sustainable Future; Proceedings of the 14th International Conference, Koper, 21–23 November 2013 [Selected Papers], University of Primorska, Faculty, University of Primorska, Faculty of Management Koper.
  4. Felix Höffler & Sebastian Kranz, 2007. "Imperfect Legal Unbundling of Monopolistic Bottlenecks," Bonn Econ Discussion Papers, University of Bonn, Germany bgse16_2007, University of Bonn, Germany.
  5. Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," Discussion Paper Series of 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 167, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  6. Fu, Qiang & Lu, Jingfeng, 2006. "The beauty of "bigness" in contest design: merging or splitting?," MPRA Paper 947, University Library of Munich, Germany.
  7. Inderst, Roman & Muller, Holger M. & Warneryd, Karl, 2007. "Distributional conflict in organizations," European Economic Review, Elsevier, Elsevier, vol. 51(2), pages 385-402, February.
  8. Kräkel, Matthias, 2006. "On the “Adverse Selection” of Organizations," IZA Discussion Papers 2396, Institute for the Study of Labor (IZA).
  9. repec:ebl:ecbull:v:12:y:2002:i:2:p:1-13 is not listed on IDEAS
  10. Gürtler, Oliver, 2006. "Haggling for Rents, Relational Contracts, and the Theory of the Firm," Discussion Paper Series of 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 169, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  11. Wärneryd, Karl, 2014. "Rent Seeking and Organizational Structure," Working Paper Series in Economics and Finance, Stockholm School of Economics 749, Stockholm School of Economics.
  12. Wulf, Julie, 2009. "Influence and inefficiency in the internal capital market," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(1), pages 305-321, October.
  13. Warneryd, Karl, 2001. "Replicating contests," Economics Letters, Elsevier, Elsevier, vol. 71(3), pages 323-327, June.
  14. Johannes Münster, 2009. "Group contest success functions," Economic Theory, Springer, Springer, vol. 41(2), pages 345-357, November.
  15. Ivo Bischoff & Frédéric Blaeschke, 2013. "Incentives and Influence Activities in the Public Sector: the Trade-off in Performance Budgeting and Conditional Grants," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201320, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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