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Influence Costs and Hierarchy

Author

Listed:
  • Inderst, Roman

    (Sonderforschungsbereich 504)

  • Müller, Holger M.

    (Department of Economics, University of Mannheim)

  • Wärneryd, Karl

    (Department of Economics, Stockholm School of Economics)

Abstract

In an internal capital market, individual departments may compete for a share of the firm's budget by engaging in wasteful influence activities. We show that firms with more levels of hierarchy may experience lower influence costs than less hierarchical firms, even though the former provide more opportunities for exerting influence. We further argue that the widely discussed change from the U-form to the M-form organization in the 1920's may be related to attempts to limit divisional lobbying. In particular, we show that influence costs under the U-form organization are lower than under the M-form organization if and only if the firm's operations are sufficiently small.

Suggested Citation

  • Inderst, Roman & Müller, Holger M. & Wärneryd, Karl, 2000. "Influence Costs and Hierarchy," Sonderforschungsbereich 504 Publications 00-30, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:00-30
    Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, is gratefully acknowledged.
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    Citations

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    Cited by:

    1. Wärneryd, Karl, 2014. "Rent Seeking and Organizational Structure," SSE/EFI Working Paper Series in Economics and Finance 749, Stockholm School of Economics.
    2. Kräkel, Matthias, 2006. "On the "Adverse Selection" of Organizations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 168, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Kräkel, Matthias, 2006. "Firm Size, Economic Situation and Influence Activities," Bonn Econ Discussion Papers 16/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    4. Fu, Qiang & Lu, Jingfeng, 2006. "The beauty of "bigness" in contest design: merging or splitting?," MPRA Paper 947, University Library of Munich, Germany.
    5. Oliver Gürtler, 2010. "Haggling for Rents, Relational Contracts, and the Theory of the Firm," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 62(4), pages 359-377, October.
    6. Cordella, Antonio & Cordella, Tito, 2017. "Motivations, monitoring technologies, and pay for performance," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 236-255.
    7. Ivo Bischoff & Frédéric Blaeschke, 2013. "Incentives and Influence Activities in the Public Sector: the Trade-off in Performance Budgeting and Conditional Grants," MAGKS Papers on Economics 201320, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    8. Wulf, Julie, 2009. "Influence and inefficiency in the internal capital market," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 305-321, October.
    9. repec:elg:eechap:15325_6 is not listed on IDEAS
    10. Brice Corgnet & Ludivine Martin & Peguy Ndodjang & Angela Sutan, 2015. "On the Merit of Equal Pay: When Influence Activities Interact with Incentive Setting," Working Papers 15-09, Chapman University, Economic Science Institute.
    11. repec:ebl:ecbull:v:12:y:2002:i:2:p:1-13 is not listed on IDEAS
    12. Szu-Wen Chou, 2002. "Flattened Resource Allocation, Hierarch Design and the Boundaries of the Firm," Levine's Working Paper Archive 618897000000000056, David K. Levine.
    13. Johannes Münster, 2009. "Group contest success functions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 41(2), pages 345-357, November.
    14. Dur, Robert & Roelfsema, Hein, 2010. "Social exchange and common agency in organizations," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(1), pages 55-63, January.
    15. Yildirim, Mustafa, 2019. "Optimal team size under legislative bargaining with costly recognition," Economics Letters, Elsevier, vol. 177(C), pages 81-84.
    16. Fu, Qiang & Lu, Jingfeng, 2009. "The beauty of "bigness": On optimal design of multi-winner contests," Games and Economic Behavior, Elsevier, vol. 66(1), pages 146-161, May.
    17. Inderst, Roman & Muller, Holger M. & Warneryd, Karl, 2007. "Distributional conflict in organizations," European Economic Review, Elsevier, vol. 51(2), pages 385-402, February.
    18. repec:elg:eechap:15325_7 is not listed on IDEAS
    19. Cedomir Ljubojevic & Gordana Ljubojevic & Nina Maksimovic, 2013. "Corporate Governance and Competitive Capability in Serbian Companies," MIC 2013: Industry, Science and Policy Makers for Sustainable Future; Proceedings of the 14th International Conference, Koper, 21–23 November 2013 [Selected Papers],, University of Primorska, Faculty of Management Koper.
    20. Warneryd, Karl, 2001. "Replicating contests," Economics Letters, Elsevier, vol. 71(3), pages 323-327, June.

    More about this item

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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