Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 392: Influence Costs and Hierarchy

Roman Inderst, Holger M. Müller and Karl Wärneryd ()
Additional contact information
Roman Inderst: Sonderforschungsbereich 504, Postal: University of Mannheim, L13,15, DE-68131 Mannheim, Germany
Holger M. Müller: Department of Economics, Postal: University of Mannheim, A5, DE-6831 Mannheim, Germany
Karl Wärneryd: Dept. of Economics, Stockholm School of Economics, Postal: Box 6501, SE-113 83 Stockholm, Sweden

Abstract: In an internal capital market, individual departments may compete for a share of the firm´s budget by engaging in wasteful influence activities. We show that firms with more levels of hierarchy may experience lower influence costs than less hierarchical firms, even though the former provide more opportunities for exerting influence. We further argue that the widely discussed change from the U-form to the M-form organization in the 1920s may be related to attempts to limit divisional lobbying. In particular, we show that influence costs under the U-form organization are lower than under the M-form organization if and only if the firm's operations are sufficiently small.

Keywords: Hierarchies; influence activities; internal capital markets; U-form vs. M-form organization

JEL-codes: D74; G31; G34

27 pages, June 21, 2000

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