Working Paper Series,
Research Institute of Industrial Economics

Abstract: We establish a correlation between the hierarchical structure of a firm and the likelihood of business creation among its former employees, using a sample of 16 million observations of Swedish workers and a novel proxy for hierarchies based on occupation data. Conditional on firm size and many other variables, employees in firms with more layers are less likely to enter entrepreneurship, to become selfemployed, and to switch to another employer. The effects of layers are much stronger for business creation than for jobswitching and they are stronger for entrepreneurship than for selfemployment. We discuss two potential explanations for the distinctive hierarchy effect we find. Part of the effect could be to be due to preference sorting by employees, and part due to employees in firms with fewer layers having a broader range of skills. One test showing that the probability of entrepreneurship increases with their prior rank in an organization is consistent with ability sorting and inconsistent with preference sorting.

Keywords: Entrepreneurship; Employee mobility; Hierarchy; Rank; Small firm effect

JEL-codes: D20; J20; L26; M50

46 pages, First version: February 13, 2013. Revised: November 28, 2016.

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Published as

Joacim Tåg, Thomas Åstebro and Peter Thompson, (2016), 'Hierarchies and Entrepreneurship', European Economic Review, vol 89, pages 129-147

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