Incentives, Information, and Organizational Form
Al. 187 WP 331
35 Pages Posted: 19 Feb 1998
Date Written: 1997
We model an organization as a hierarchy of managers erected on top of a technology (here consisting of a collection of plants). In our framework, the role of a manager is to take steps to reduce the adverse consequences of shocks that affect the plants beneath him. We argue that different organizational forms give rise to different information about managers'performance and therefore differ according to how effective incentives canbe in encouraging a good performance. In particular, we show that, undercertain assumptions, the M-form (multi-divisional form) is likely to provide better incentives than the U-form (unitary form) because it promotes yardstick competition (i.e. relative performance evaluation) more effectively. We conclude by presenting evidence that the assumptions on which this comparison rests are satisfied for Chinese data.
JEL Classification: D2, D8, H1, L2, P5
Suggested Citation: Suggested Citation