Working Papers, Department of Economics, Aarhus School of Business, University of Aarhus
No 06-10:
Testing Models of Hierarchy: Span of Control, Compensation and Career Dynamics
Valérie Smeets and Frederic Warzynski
Abstract: In this paper, we test implications from various theories
of hierarchies in organizations, in particular the assignment model (Rosen,
1982), the incentives model (Rosen, 1986), the supervision model (Qian,
1994) and the knowledge-
based hierarchy model (Garicano, 2000;
Garicano and Rossi-Hansberg, 2006).
We use a unique dataset providing
personnel records from a large European
firm in an high tech
manufacturing industry from January 1997 to May 2004.
An unusually rare
feature of this dataset is that relationships within the hierarchy are
reported and we can therefore identify the chain of command.
Some of
our results are in line with the Garicano and Rossi-Hansberg (2006)
model of hierarchies when communication costs are decreasing: we observe
an increase in the span, an increase in wage inequality between job
levels, and
the introduction of a new hierarchical level. However, we
also find evidence
of learning and reallocation of talent within and
across job levels, a finding
that can not be explained by a static
model of knowledge based hierarchy
but rather by dynamic models of
careers in organizations (e.g. Gibbons and
Waldman, 1999). We then
propose a new model of hierarchies where individuals accumulate general and
managerial human capital on the job, and firms
learn gradually about
individuals' managerial ability and allocate managers
to span according
to their expected effective ability. This theory explains our
empirical
findings and provides a richer theory of careers in hierarchie
Keywords: hierarchy; span of control; wage determination; promotions; careers; (follow links to similar papers)
JEL-Codes: J24; J31; (follow links to similar papers)
41 pages, November 1, 2006
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