Hierarchy Design with Socialism in Internal Capital Markets
نویسنده
چکیده
This paper compares the efficiency of flat and tall hierarchies from the perspective of ‘socialism in internal capital markets’ (SICM) — a recently documented problem of multi-segment firms in which high-profit segments tend to be underinvested and low-profit segments tend to be overinvested. SICM is characterized with the possibility of divisionalization — grouping elementary business segments into divisions and delegating decisions to division managers, which transforms flat hierarchies into tall hierarchies. We found that divisionalization aggravates the problem of SICM, suggesting that U-form (undivisionalized) organizations can outperform M-form (divisionalized) organizations — a result that is in contrast to Williamson’s “M-form hypothesis.” In addition, the SICM problem for a given divisionalized firm can be alleviated by redirecting more managerial ownership from high-tier managers to lowtier managers. Keyword: M-form hypothesis, Hierarchy, Internal Capital Markets JEL Classification No: G34. L22 (G3, G31)
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