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Power inside the firm and the market: A general equilibrium approach

  • Marin, Dalia
  • Verdier, Thierry

Recent years have witnessed an enormous amount of reorganization of the corporate sector in the United States and Europe. This article examines the role of market competition in this trend of corporate reorganization. We find that, at intermediate levels of competition, the CEO of the corporation decides to have less power inside the firm and to delegate control to lower levels of the firms’ hierarchy. Workers’ empowerment and the move to a flatter organizational structure emerge as an equilibrium when competition is not too tough and not too weak. The model predicts merger waves or waves of outsourcing when countries become more integrated in the global economy as the corporate sector reorganizes in response to an increase in international competition.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19255.

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Date of creation: 2008
Date of revision:
Publication status: Published in Journal of the European Economic Association 4 6(2008): pp. 752-788
Handle: RePEc:lmu:muenar:19255
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Web page: http://www.vwl.uni-muenchen.de

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  1. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
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  9. Raghuram Rajan & Julie Wulf, 2003. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," NBER Working Papers 9633, National Bureau of Economic Research, Inc.
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  13. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
  14. Aghion, Philippe & Tirole, Jean, 1995. "Some implications of growth for organizational form and ownership structure," European Economic Review, Elsevier, vol. 39(3-4), pages 440-455, April.
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  19. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
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