DP3526 Power Inside the Firm and the Market: a General Equilibrium Approach

Author(s): Dalia Marin, Thierry Verdier
Publication Date: September 2002
Keyword(s): allocation of control, corporate reorganisation, monopolistic competition, theory of the firm
JEL(s): D23, L1, L22
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3526

Recent years have witnessed an enormous amount of reorganization of the corporate sector in the US and in Europe. This paper examines the role of market competition for this trend in corporate reorganization. We find that at intermediate levels of competition the CEO of the corporation decides to have less power inside the firm and to delegate control to lower levels of the firms? hierarchy. Thus, workers empowerment and the move to flatter firm organizations emerge as an equilibrium when competition is not too tough and not too weak. The model predicts merger waves or waves of outsourcing when countries become more integrated into the world economy as the corporate sector reorganizes in response to an increase in international competition.