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The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms

  • Raghuram G. Rajan
  • Luigi Zingales

A fundamental problem entrepreneurs face in the formative stages of their businesses is how to provide incentives for employees to protect, rather than steal, the source of organizational rents. We study how the entrepreneur's response to this problem will determine the organization's internal structure, growth, and its eventual size. In particular, our model suggests large, steep hierarchies will predominate in physical capital intensive industries, and these will typically have seniority-based promotion policies. By contrast, flat hierarchies will be seen in human capital intensive industries. These will have up-or-out promotion systems, where experienced managers either become owners or are fired. Furthermore, flat hierarchies will have more distinctive technologies or cultures than steep hierarchies. The model points to some essential differences between organized hierarchies and markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7546.

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Date of creation: Feb 2000
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Publication status: published as Rajan, Raghuram G. and Luigi Zingales. "The Firm As A Dedicated Hierarchy: A Theory Of The Origins And Growth Of Firms," Quarterly Journal of Economics, 2001, v116(3,Aug), 805-851.
Handle: RePEc:nbr:nberwo:7546
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