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Influence Costs and Hierarchy

  • Inderst, Roman


    (Sonderforschungsbereich 504)

  • Müller, Holger M.


    (Department of Economics, University of Mannheim)

  • Wärneryd, Karl


    (Department of Economics, Stockholm School of Economics)

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.

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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 00-30.

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Length: 27 pages
Date of creation: 21 Jun 2000
Date of revision:
Handle: RePEc:xrs:sfbmaa:00-30
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, is gratefully acknowledged.
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