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Influence Costs and Hierarchy

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Author Info
Inderst, Roman (Sonderforschungsbereich 504)
Müller, Holger M. (Department of Economics)
Wärneryd, Karl () (Dept. of Economics, Stockholm School of Economics)

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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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Publisher 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
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Handle: RePEc:hhs:hastef:0392

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

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Find related papers by JEL classification:
D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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  1. Robert Dur & Hein Roelfsema, 2006. "Social Exchange and Common Agency in Organizations," Tinbergen Institute Discussion Papers 06-111/1, Tinbergen Institute, revised 02 Jul 2007. [Downloadable!]
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  2. Matthias Kräkel, 2006. "On the “Adverse Selection” of Organizations," Bonn Econ Discussion Papers bgse15_2006, University of Bonn, Germany. [Downloadable!]
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  3. Felix Höffler & Sebastian Kranz, 2007. "Legal Unbundling can be a Golden Mean between Vertical Integration and Separation," Bonn Econ Discussion Papers bgse15_2007, University of Bonn, Germany. [Downloadable!]
  4. Marco Delmastro, 2002. "On the choice of incentives in firms: influence activity, monitoring technology and organizational structure," Economics Bulletin, Economics Bulletin, vol. 12, pages 1-13. [Downloadable!]
  5. Matthias Kräkel, 2006. "Firm Size, Economic Situation and Influence Activities," Discussion Papers 167, 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 of Munich. [Downloadable!]
    Other versions:
  6. Felix Höffler & Sebastian Kranz, 2007. "Imperfect Legal Unbundling of Monopolistic Bottlenecks," Bonn Econ Discussion Papers bgse16_2007, University of Bonn, Germany. [Downloadable!]
  7. Fu, Qiang & Lu, Jingfeng, 2006. "The beauty of "bigness" in contest design: merging or splitting?," MPRA Paper 947, University Library of Munich, Germany. [Downloadable!]
  8. Oliver Gürtler, 2006. "Haggling for Rents, Relational Contracts, and the Theory of the Firm," Discussion Papers 169, 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 of Munich. [Downloadable!]
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