DP6734 Corporate Hierarchies and the Size of Nations: Theory and Evidence

Author(s): Dalia Marin, 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, international trade with endogenous firm organizations
JEL(s): D23, F12, F14, L22
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6734

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.