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Concealment, delegation and hierarchy of the company

8th National Competition for Economic Research Grants

Industrial economics and regulation

Senior Researcher : Susana Esteban Tavera

Research Centre or Institution : Universidad Autónoma de Barcelona.


This project analyses how the hierarchical structure of an organisation makes it possible to conceal the abilities of its executives by means of the delegation of their decisions. Although a vertical structure permits the allocation of each task to the appropriate decision level, thus contributing to efficiency, it also enables executives to use the vertical structure to delegate decisions and thus hide their intrinsic abilities. The shareholders, however, endogenise this behaviour by modifying the structure of the company or altering employment contracts. This project analyses how two instruments (adding compensation for dismissal to the employment contract or creating a more horizontal organisational structure) interact with executives' incentives and determine equilibrium. The results indicate that horizontal organisational structures are preferable when the environment is competitive or when the abilities of the executive are critical for the company's productivity, while more hierarchical structures predominate in environments in which executives' abilities are less critical.

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