Too many theories, too few facts? What the data tell us about the link between span of control, compensation and career dynamics
In this paper, we use a unique personnel dataset from a large European firm in an high tech manufacturing industry that provides information about hierarchical relationships. This unusually rare feature allows us to identify the chain of command. We provide a few stylized facts about the link between span of control, compensation and career dynamics and relate our findings to the existing theoretical literature of hierarchies in organizations: the assignment model, the incentives model, the information processing model, the supervision model, and the knowledge-based hierarchy model. We observe an increase in the span, an increase in wage inequality between job levels, and the introduction of a new hierarchical level. We also find that higher spans of control are associated with higher wages. The knowledge-based hierarchy provides the most likely explanation for these results when communication costs are decreasing. However, we also find evidence of learning and reallocation of talent within and across job levels, a finding that can not be explained by a static model of knowledge based hierarchy but rather by dynamic models of careers in organizations. Finally, we provide a few suggestions to enrich the existing theoretical literature and reconcile it with the facts.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
- Robert Gibbons & Michael Waldman, 1999. "A Theory of Wage and Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1321-1358.
- Mathias Dewatripont & Patrick Bolton, 2004.
"The firm as a communication network,"
ULB Institutional Repository
2013/9599, ULB -- Universite Libre de Bruxelles.
- Mathias Dewatripont & Patrick Bolton, 1996. "The firm as a communication network," ULB Institutional Repository 2013/9597, ULB -- Universite Libre de Bruxelles.
- Mathias Dewatripont & Patrick Bolton, 1994. "The firm as a communication network," ULB Institutional Repository 2013/9595, ULB -- Universite Libre de Bruxelles.
- Michael Gibbs & Wallace Hendricks, 2004. "Do Formal Salary Systems Really Matter?," ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
- Rosen, Sherwin, 1986.
"Prizes and Incentives in Elimination Tournaments,"
American Economic Review,
American Economic Association, vol. 76(4), pages 701-15, September.
- Pedro Ortin-Angel & Vicente Salas-Fumas, 2002. "Compensation and Span of Control in Hierarchical Organizations," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 848-876, October.
- Yingyi Qian, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 527-544.
- Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
- George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 881-919.
- Luis Garicano & Esteban Rossi-Hansberg, 2005.
"Organization and Inequality in a Knowledge Economy,"
NBER Working Papers
11458, National Bureau of Economic Research, Inc.
- Luis Garicano & Esteban Rossi-Hansberg, 2006. "Organization and Inequality in a Knowledge Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1383-1435.
- Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133 Elsevier.
- Patrick Bolton & Mathias Dewatripont, 1994. "The Firm as a Communication Network," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 809-839.
- Baker, George & Holmstrom, Bengt, 1995. "Internal Labor Markets: Too Many Theories, Too Few Facts," American Economic Review, American Economic Association, vol. 85(2), pages 255-59, May.
- Garicano, Luis & Hubbard, Thomas N., 2005. "Hierarchical sorting and learning costs: Theory and evidence from the law," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 349-369, October.
- Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
When requesting a correction, please mention this item's handle: RePEc:eee:labeco:v:15:y:2008:i:4:p:687-703. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.