IDEAS home Printed from https://ideas.repec.org/p/usf/wpaper/0414.html
   My bibliography  Save this paper

Flattening Firms and Wage Distribution

Author

Listed:
  • Xin Jin

    (Department of Economics, University of South Florida)

Abstract

This article studies the consequences of firm delayering on wages and the wage distribution inside firms. I consider a job-assignment model with asymmetric information and a slot constraint. The model predicts that more efficient firms are not necessarily larger than less efficient firms if firms are allowed to adjust their internal organizational structure through delayering. After delayering, wages at all levels increase and the wage distribution becomes more unequal. These predictions match a set of empirical findings in recent studies that are not well explained by existing theories.

Suggested Citation

  • Xin Jin, 2014. "Flattening Firms and Wage Distribution," Working Papers 0414, University of South Florida, Department of Economics.
  • Handle: RePEc:usf:wpaper:0414
    as

    Download full text from publisher

    File URL: http://economics.usf.edu/PDF/Delayering-JIN20140907.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Yingyi Qian, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 527-544.
    3. Dan Bernhardt, 1995. "Strategic Promotion and Compensation," Review of Economic Studies, Oxford University Press, vol. 62(2), pages 315-339.
    4. Bauer, Thomas K. & Bender, Stefan, 2001. "Flexible Work Systems and the Structure of Wages: Evidence from Matched Employer-Employee Data," IZA Discussion Papers 353, Institute of Labor Economics (IZA).
    5. Timothy F. Bresnahan & Erik Brynjolfsson & Lorin M. Hitt, 2002. "Information Technology, Workplace Organization, and the Demand for Skilled Labor: Firm-Level Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 339-376.
    6. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
    7. Paul Milgrom & Sharon Oster, 1987. "Job Discrimination, Market Forces, and the Invisibility Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 453-476.
    8. Joshua C. Pinkston, 2009. "A Model of Asymmetric Employer Learning with Testable Implications," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 367-394.
    9. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
    10. Raghuram G. Rajan & Julie Wulf, 2006. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 759-773, November.
    11. Valerie Smeets & Michael Waldman & Frederic Warzynski, 2019. "Performance, Career Dynamics, and Span of Control," Journal of Labor Economics, University of Chicago Press, vol. 37(4), pages 1183-1213.
    12. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    13. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2010. "Does Product Market Competition Lead Firms to Decentralize?," American Economic Review, American Economic Association, vol. 100(2), pages 434-438, May.
    14. Lorenzo Caliendo & Ferdinando Monte & Esteban Rossi-Hansberg, 2015. "The Anatomy of French Production Hierarchies," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 809-852.
    15. Lisa B. Kahn, 2013. "Asymmetric Information between Employers," American Economic Journal: Applied Economics, American Economic Association, vol. 5(4), pages 165-205, October.
    16. Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, vol. 94(2), pages 192-196, May.
    17. Maria Guadalupe & Julie Wulf, 2010. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 105-127, October.
    18. Jed DeVaro & Michael Waldman, 2012. "The Signaling Role of Promotions: Further Theory and Empirical Evidence," Journal of Labor Economics, University of Chicago Press, vol. 30(1), pages 91-147.
    19. Bauer, Thomas & Bender, Stefan, 2001. "Flexible Wages Systems and the Structure of Wages: Evidence from Matched Employer-Employee Data," CEPR Discussion Papers 2980, C.E.P.R. Discussion Papers.
    20. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 315-333.
    21. Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, vol. 75, pages 123-123.
    22. Michael Waldman, 2003. "Ex Ante versus Ex Post Optimal Promotion Rules: The Case of Internal Promotion," Economic Inquiry, Western Economic Association International, vol. 41(1), pages 27-41, January.
    23. Michael Waldman, 1984. "Worker Allocation, Hierarchies and the Wage Distribution," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 95-109.
    24. Lorenzo Caliendo & Esteban Rossi-Hansberg, 2012. "The Impact of Trade on Organization and Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1393-1467.
    25. Robert Gibbons & Michael Waldman, 1999. "A Theory of Wage and Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1321-1358.
    26. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
    27. Colombo, Massimo G. & Delmastro, Marco, 1999. "Some stylized facts on organization and its evolution," Journal of Economic Behavior & Organization, Elsevier, vol. 40(3), pages 255-274, November.
    28. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
    29. Luis Garicano & Esteban Rossi-Hansberg, 2006. "Organization and Inequality in a Knowledge Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1383-1435.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jin, Xin, 2014. "Flattening Firms and Wage Distribution," MPRA Paper 58485, University Library of Munich, Germany.
    2. Jin, Xin, 2014. "The Signaling Role of Note Being Promoted: Theory and Evidence," MPRA Paper 58484, University Library of Munich, Germany.
    3. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.
    4. Valerie Smeets & Michael Waldman & Frederic Warzynski, 2019. "Performance, Career Dynamics, and Span of Control," Journal of Labor Economics, University of Chicago Press, vol. 37(4), pages 1183-1213.
    5. Xin Jin, 2014. "The Signaling Role of Not Being Promoted: Theory and Evidence," Working Papers 0314, University of South Florida, Department of Economics.
    6. Dato, Simon & Grunewald, Andreas & Kräkel, Matthias & Müller, Daniel, 2016. "Asymmetric employer information, promotions, and the wage policy of firms," Games and Economic Behavior, Elsevier, vol. 100(C), pages 273-300.
    7. Oyer, Paul & Schaefer, Scott, 2011. "Personnel Economics: Hiring and Incentives," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 20, pages 1769-1823, Elsevier.
    8. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    9. Michael Waldman, 2012. "Theory and Evidence in Internal Labor Markets," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.),The Handbook of Organizational Economics, Princeton University Press.
    10. Suman Ghosh & Michael Waldman, 2010. "Standard promotion practices versus up‐or‐out contracts," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 301-325, June.
    11. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
    12. Cassidy, Hugh & DeVaro, Jed & Kauhanen, Antti, 2016. "Promotion signaling, gender, and turnover: New theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 140-166.
    13. Jed DeVaro & Michael Waldman, 2012. "The Signaling Role of Promotions: Further Theory and Empirical Evidence," Journal of Labor Economics, University of Chicago Press, vol. 30(1), pages 91-147.
    14. Jed DeVaro & Hodaka Morita, 2013. "Internal Promotion and External Recruitment: A Theoretical and Empirical Analysis," Journal of Labor Economics, University of Chicago Press, vol. 31(2), pages 227-269.
    15. Belloc, Filippo & Burdin, Gabriel & Landini, Fabio, 2020. "Corporate Hierarchies under Employee Representation," IZA Discussion Papers 13717, Institute of Labor Economics (IZA).
    16. Ambra, Poggi & Piergiovanna, Natale, 2017. "Learning by hiring, network centrality and within-firm wage dispersion," Working Papers 369, University of Milano-Bicocca, Department of Economics, revised 19 Aug 2017.
    17. Junichiro Ishida, 2012. "Promotion without Commitment: Signaling, Time Inconsistency and Decentralization of the Firm," ISER Discussion Paper 0843, Institute of Social and Economic Research, Osaka University.
    18. Smeets, Valérie & Warzynski, Frederic, 2006. "Testing Models of Hierarchy: Span of Control, Compensation and Career Dynamics," Working Papers 06-10, University of Aarhus, Aarhus School of Business, Department of Economics.
    19. Jed DeVaro & Oliver Gürtler, 2020. "Strategic shirking in competitive labor markets: A general model of multi‐task promotion tournaments with employer learning," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 335-376, April.
    20. Dalia Marin & Linda Rousová & Thierry Verdier, 2021. "Do Multinationals Transplant their Business Model?," Economic Journal, Royal Economic Society, vol. 131(634), pages 899-945.
    21. Luis Garicano & Esteban Rossi-Hansberg, 2015. "Knowledge-Based Hierarchies: Using Organizations to Understand the Economy," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 1-30, August.

    More about this item

    Keywords

    Delayering; asymmetric information; wage distribution; slot constraint;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:usf:wpaper:0414. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/deusfus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Padmaja Ayyagari (email available below). General contact details of provider: https://edirc.repec.org/data/deusfus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.