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Does Product Market Competition Lead Firms to Decentralize?

  • Nicholas Bloom


    (Department of Economics, Stanford University)

  • Raffaella Sadun


    (Harvard Business School, Strategy Unit)

  • John Van Reenen


    (Department of Economics, London School of Economics)

There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address the empirical lacuna we have developed a research program to measure the internal organization of firms - including their decentralization decisions - across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization. For example, tougher competition may make local manager's information more valuable, as delays to decisions become more costly. Since globalization and liberalization have increased the competitiveness of product markets, one explanation for the trend towards decentralization could be increased competition. Of course there are a range of other factors that may also be at play, including human capital, information and communication technology, culture and industrial composition. To tackle these issues we collected detailed information on the internal organization of firms across nations. The few datasets that exist are either from a single industry or (at best) across many firms in a single country . We analyze data on almost 4,000 firms across twelve countries in Europe, North America and Asia. We find that competition does indeed seem to foster greater decentralization.

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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-052.

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Length: 12 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:hbs:wpaper:10-052
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  1. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers W02/04, Institute for Fiscal Studies.
  2. Hart, Oliver D. & Moore, John, 2005. "On the Design of Hierarchies: Coordination Versus Specialization," Scholarly Articles 3448676, Harvard University Department of Economics.
  3. Bloom, Nicholas & Sadun, Raffaella & Van Reenen, John, 2009. "The Organization of Firms Across Countries," CEPR Discussion Papers 7338, C.E.P.R. Discussion Papers.
  4. Bloom, Nicholas & Van Reenen, John, 2006. "Measuring and Explaining Management Practices Across Firms and Countries," CEPR Discussion Papers 5581, C.E.P.R. Discussion Papers.
  5. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  6. Van Reenen, John & Caroli, Eve, 2001. "Skill-Biased Organizational Change? Evidence from a panel of British and French establishments," Economics Papers from University Paris Dauphine 123456789/10093, Paris Dauphine University.
  7. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  8. Garicano, Luis & Hubbard, Thomas N, 2007. "Managerial Leverage Is Limited by the Extent of the Market: Hierarchies, Specialization, and the Utilization of Lawyers' Human Capital," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 1-43, February.
  9. repec:oup:qjecon:v:120:y:2005:i:2:p:701-728 is not listed on IDEAS
  10. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2011. "Field Experiments with Firms," IZA Discussion Papers 5723, Institute for the Study of Labor (IZA).
  11. repec:oup:qjecon:v:122:y:2007:i:4:p:1759-1799 is not listed on IDEAS
  12. Guadalupe, Maria & Wulf, Julie, 2009. "The Flattening Firm and Product Market Competition," CEPR Discussion Papers 7253, C.E.P.R. Discussion Papers.
  13. repec:oup:qjecon:v:122:y:2007:i:4:p:1351-1408 is not listed on IDEAS
  14. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  15. Jakub Kastl & David Martimort & Salvatore Piccolo, 2008. "Delegation and R&D Incentives: Theory and Evidence from Italy," 2008 Meeting Papers 1095, Society for Economic Dynamics.
  16. repec:oup:qjecon:v:117:y:2002:i:1:p:339-376 is not listed on IDEAS
  17. Massimo G. Colombo & Marco Delmastro, 2004. "Delegation of Authority In Business Organizations: An Empirical Test," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 53-80, 03.
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