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Discussion Paper Details

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Title: Corporate Hierarchies and the Size of Nations: Theory and Evidence

Author(s): Dalia Marin and Thierry Verdier

Publication Date: March 2008

Keyword(s): corporate organization in similar countries, empirical test of the theory of the firm, endogenous congruence in the firm and international trade with endogenous firm organizations

Programme Area(s): Industrial Organization and International Trade and Regional Economics

Abstract: Corporate organization varies within a country and across countries with country size. The paper starts by establishing some facts about corporate organization based on unique data of 660 Austrian and German corporations. The larger country (Germany) has larger firms with flatter and more decentralized corporate hierarchies compared to the smaller country (Austria). Firms in the larger country change their organization less fast than firms in the smaller country. Over time firms have been introducing less hierarchical organizations by delegating power to lower levels of the corporation. We develop a theory, which explains these facts and which links these features to the trade environment that countries and firms face. We introduce firms with internal hierarchies in a Krugman(1980) cum Melitz and Ottaviano (2007) model of trade. We show that international trade and the toughness of competition in international markets induce a power struggle in firms, which eventually leads to decentralized corporate hierarchies. We offer empirical evidence, which is consistent with the models predictions.

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Bibliographic Reference

Marin, D and Verdier, T. 2008. 'Corporate Hierarchies and the Size of Nations: Theory and Evidence'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6734