Management Quality and Firm Hierarchy in Industry Equilibrium

Abstract

I incorporate a monitoring-based firm hierarchy into an industry equilibrium model with heterogeneous firms. I then use the theory to study aggregate impact of an economy-wide improvement in monitoring efficiency. This shock generates a selection effect which favors more hierarchical (i.e., more layers) firms. Interestingly, these implications depend on firms’ heterogeneous choices about their hierarchy and completely disappear when firms are homogeneous in terms of the number of layers inside the hierarchy.