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Hierarchical Structures and Dynamic Incentives

Author

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  • Shin, Dongsoo
  • Strausz, Roland

Abstract

We study the optimal hierarchical structure of an organization under limited commitment. The organization cannot make a long term commitment to wages and output levels, while it can commit to its hierarchical structure. We show that the optimal hierarchical structure is horizontal when it is highly likely that the employees are efficient or inefficient. By contrast, when such likelihood is intermediate or output does not expand very fast over time, the optimal hierarchical structure is vertical - with a vertical hierarchy, the organization can mitigate dynamic incentive problems linked to limited commitment.

Suggested Citation

  • Shin, Dongsoo & Strausz, Roland, 2010. "Hierarchical Structures and Dynamic Incentives," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 318, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:318
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    File URL: https://epub.ub.uni-muenchen.de/13236/1/318.pdf
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    Keywords

    Dynamic Incentives; Organization Design;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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