DP7253 The Flattening Firm and Product Market Competition

Author(s): Maria Guadalupe, Julie Wulf
Publication Date: April 2009
Keyword(s): competition, complementarities, decentralization, hierarchy, incentives, organizational change, organizational structure, performance-related pay
JEL(s): L2, M2, M52
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7253

This paper establishes a causal effect of product market competition on various characteristics of organizational design. Using a unique panel dataset on firm hierarchies of large U.S. firms (1986-1999) and a quasi-natural experiment (trade liberalization), we find that increasing competition leads firms to flatten their hierarchies, i.e., (i) firms reduce the number of positions between the CEO and division managers and (ii) increase the number of positions reporting directly to the CEO (span of control). Firms also alter the structure and level of division manager compensation, increasing total pay as well as local (division-level) and global (firm-level) incentives. Our estimates show that for the average firm, span of control increased by 6% and depth decreased by 11% as a result of the quasi-natural experiment.