On Hierarchies and Communication

Many economic organizations have some relational structure, meaning that economic agents do not only differ with respect to certain individual characteristics such as wealth and preferences, but also belong to some relational structure in which they usually take different positions. Two examples of such structures are communication networks and hierarchies. In the literature the distinction between these two types of relational structures is not always clear. In models of restricted cooperation this distinction should be defined by properties of the set of feasible coalitions. We characterize the feasible sets in communication networks and compare them with feasible sets arising from hierarchies

Why Hierarchy? Communication and Information Acquisition in Organizations

In most firms, if not all, workers are divided asymmetrically in terms of authority and responsibility. In this paper, we view the asymmetric allocations of authority and responsibility as essential features of hierarchy and examine why hierarchies often prevail in organizations from that perspective. The focus of attention is on the tradeoff between costly information acquisition and costless communication. When the agency problem concerning information acquisition is sufficiently severe, the contractual arrangement which allocates responsibility asymmetrically often emerges as the optimal organizational form, which gives rise to the chain of command pertaining to hierarchical organizations. This explains why hierarchies often prevail in firms since a relatively fixed group of members must confront with new problems and come up with solutions on the day-to-day basis, and hence the agency problem is an issue to be reckoned with.

Colluding through Suppliers

In a dynamic game between N retailers and a large number of suppliers, I show that inefficient contracting emerges as a mechanism to implement collusion among retailers, building on the natural ‘complementarity’ between retail and wholesale prices. When efficient collusion is not sustainable, this complementarity allows retailers to rely on inefficient input supply, entailing double marginalization and negative franchise fees, to squeeze the wedge between collusive and deviation profits. I also study the role of communication on the equilibrium outcomes of games where retailers have the initiative. It turns out that communication is indeed fundamental to strengthen cartels' sustainability, although generating efficiency losses.Bertrand competition, double marginalization, collusion, competing hierarchies.

Two Sides of the Same Coin? - The Effects of Hierarchy Inside and Outside Enterprise Social Networks

With more companies using Enterprise Social Networks (ESN) for employee communication and collaboration, the influence of ESN on organizational hierarchies has been subject of discussions in science and practice. Conversely, the question if formal hierarchies affect interaction inside ESN and outside (i.e., personal interaction or interaction via traditional media) in the same way has not yet been addressed. The aim of our research is to analyse those hierarchical effects. By contrasting a rich dataset comprising two years of communication and collaboration inside an ESN with data from an online survey, we found significant differences between the hierarchical effects inside and outside the ESN and their impact on communication and collaboration. Although our findings indicate significant impact of formal hierarchy, we found it to be weaker inside the ESN. We conclude that interaction inside ESN is more inclusive and balanced across hierarchical levels

Impact of the High Speed Trains on the European Cities Hierarchy

The European space is marked by the recent beginning of the dualism nation-region. In it the cities take on a fundamental role because their success becomes the success of the territories around. Manuel Castell has maintained that the city is the social structure in which any territorial phenomena (from the economical development processes to the relations between classes or ethnic groups, from the public intervention to the financial accumulation) takes on its bigger strength because in it are concentrated the focusing in the territorial transformations. Obvious the cities are not the same, for physical or functional dimension; besides every innovation adds and modifies the relational system previously created. Aim of the paper is to analyse the factors generating the urban hierarchies to the European level and the impact on it of the new high velocity nets. In the first section it is carried out a reading/analysis of the hierarchies in the urban European system, as outlined in a series of studies. The second section analyses the role of the communication infrastructures in the building of the hierarchies and, in the third, is deepen the impact of the building of European high speed network on the fluctuations in the cities hierarchy. The paper asserts that the hierarchy is influenced by the growing of this infrastructure only for the second level positions, while the head positions are not influenced by it. One of the possible conclusion is that in a mature situation as the European territorial system, the urban structure seems to be well organized around poles with a strong persistence. This does not mean that a city could not climb the hierarchies, although this is possible only if a number of preconditions and of support policies are verified and with the remarks that this does not seem to affect the head positions, characterized by large stability.

Testing Models of Hierarchy: Span of Control, Compensation and Career Dynamics

In this paper, we test implications from various theories of hierarchies in organizations, in particular the assignment model (Rosen, 1982), the incentives model (Rosen, 1986), the supervision model (Qian, 1994) and the knowledge- based hierarchy model (Garicano, 2000; Garicano and Rossi-Hansberg, 2006). We use a unique dataset providing personnel records from a large European firm in an high tech manufacturing industry from January 1997 to May 2004. An unusually rare feature of this dataset is that relationships within the hierarchy are reported and we can therefore identify the chain of command. Some of our results are in line with the Garicano and Rossi-Hansberg (2006) model of hierarchies when communication costs are decreasing: we observe an increase in the span, an increase in wage inequality between job levels, and the introduction of a new hierarchical level. However, we also find evidence of learning and reallocation of talent within and across job levels, a finding that can not be explained by a static model of knowledge based hierarchy but rather by dynamic models of careers in organizations (e.g. Gibbons and Waldman, 1999). We then propose a new model of hierarchies where individuals accumulate general and managerial human capital on the job, and firms learn gradually about individuals' managerial ability and allocate managers to span according to their expected effective ability. This theory explains our empirical findings and provides a richer theory of careers in hierarchiehierarchy; span of control; wage determination; promotions; careers

Managerial Compensations and Information Sharing under Moral Hazard: Is Transparency Good?

We study the effects of information sharing on optimal contracting in a vertical hierarchies model with moral hazard and effort externalities. The paper has three main objectives. First, we determine and compare the equilibrium contracts with and without communication. We identify how each principal relates her agent’s wage to the opponent’s performance when they share information about agents’ performances. It turns out that the type of effort externalities across organizations is the main determinant of the responsiveness of each agent’s reward to the opponent’s performance. Second, in order to throw novel light on the emergence of information sharing agreements, we characterize the equilibria of a non- cooperative game where principals first decide whether to share information and then offer contracts to their exclusive agents. We explore the implications of introducing certification costs and show that three types of equilibria may emerge depending on the nature and (relative) strength of effort externalities: principals bilaterally share information if agents’ effort choices exhibit strong complementarity; only the principal with stronger monitoring power discloses information in equilibrium for intermediate levels of effort’s complementarity; principals do not share information if efforts are substitutes and for low values of effort’s complementarity. Moreover, differently from the common agency framework studied in Maier and Ottaviani (2009), in our model a prisoner’s dilemma may occur when efforts are substitutes and certification costs are negligible: if a higher effort by one agent reduces the opponent’s marginal productivity of effort the equilibrium involves no communication although principals would jointly be better off by sharing information. Finally, the model also offers novel testable predictions on the impact of competition on the basic trade-off between risk and incentives, the effects of organizations’ asymmetries on information disclosure policies as well as on the link between corporate control and the power of incentives.Competing Hierarchies, Information Sharing, Moral Hazard