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Incentives, scale economies, and organizational form

By Eric Maskin, Yingyi Qian and Cheng-Gang Xu

Abstract

We model organization as the command-and-communication network of managers erected on top of technology (which is modelled as a collection of plants). In our framework, the role of a manager is to deal with shocks that affect the plants that he oversees directly or indirectly. Organizational form is then an instrument for (a) economising on managerial costs, and (b) providing managerial incentives. We show that two particular organizational forms, the M-form (multi-divisional form) and the U-form (unitary form), are the optimal structures when shocks are sufficiently 'big'. We argue however that, under certain empirical assumptions, the M-form is likely to be strictly preferable once incentives are taken into account. We conclude by showing that the empirical hypotheses on which this comparison rests are satisfied for Chinese data

Topics: HB Economic Theory, HD Industries. Land use. Labor
Publisher: Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science
Year: 1997
OAI identifier: oai:eprints.lse.ac.uk:3752
Provided by: LSE Research Online
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