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Incentives, Scale Economies, and Organizational Form - (Now published in 'Economics of Transition' (2201))

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  • Eric Maskin
  • Yingyi Qian
  • Chenggang Xu

Abstract

We model organization as the command-and-communication network of managers erected on top of technology (which is modelled as a collection of plants). In our framework, the role of a manager is to deal with shocks that affect the plants that he oversees directly or indirectly. Organizational form is then an instrument for (a) economising on managerial costs, and (b) providing managerial incentives. We show that two particular organizational forms, the M-form (multi-divisional form) and the U-form (unitary form), are the optimal structures when shocks are sufficiently 'big'. We argue however that, under certain empirical assumptions, the M-form is likely to be strictly preferable once incentives are taken into account. We conclude by showing that the empirical hypotheses on which this comparison rests are satisfied for Chinese data.

Suggested Citation

  • Eric Maskin & Yingyi Qian & Chenggang Xu, 1997. "Incentives, Scale Economies, and Organizational Form - (Now published in 'Economics of Transition' (2201))," STICERD - Theoretical Economics Paper Series 331, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  • Handle: RePEc:cep:stitep:331
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