Organizational Form and the Market for Talent

Abstract

This article brings together the market for products, the market for talent, and firms' organizational form. While the organizational design determines the allocation of blame and fame within the firm, the value of a good reputation depends on the market structure. Consequently, the market structure dictates the optimal organizational design. If competition becomes tougher and the market thicker, transparent firms decentralize while nontransparent firms concentrate control, transparency itself is improved, corporations switch from unitary to multidivisional form, and the turnover of managers increases. The model rationalizes recent trends in both executive pay and organizational design.

Multidivisional Strategy and Investment Returns

“…The results also reveal that divisionalization increases returns through an internal labor mechanism mostly discussed in theory or case studies that has received little empirical attention. Specifically, multidivisional strategies are more consequential for higher profitability when firms share key human talent—film producers—across their different divisions, consistent with the logic that input‐sharing can create synergies (e.g., Dessein et al., ), especially when talented individuals can signal their higher value more easily in the M‐form (Harstad, ). Relatedly, multidivisional distribution companies seem to provide incentives to star talent to participate in their projects, though not necessarily through higher pay.…”

Career Concerns and Product Market Competition

“…First, I explicitly study a moral‐hazard problem and introduce explicit incentive contracts on top of managerial career concerns. Second, I allow for firm‐specific managerial skills, which prove to be important for the conclusions in Harstad (). In fact, as it emerges from the second example in Section , depending on the generality of managerial skills, increased competition can have quite different effects on CEO pay, and therefore on the relative merits of different organizational forms.…”

Career Concerns and Product Market Competition

“…Using the model by Raith (2003) as a building block and abstracting from agency problems, Harstad (2007) studies how product market competition affects firms' optimal organizational form. This model is similar to mine in that firms interact repeatedly on an imperfectly competitive product market and bid for talent when this is revealed by the achievement of a cost reduction.…”

“…First, I explicitly study a moral-hazard problem and introduce explicit incentive contracts on top of managerial career concerns. Second, I allow for firm-specific managerial skills, which prove to be important for the conclusions in Harstad (2007). In fact, as it emerges from the second example in Section 5, depending on the generality of managerial skills, increased competition can have quite different effects on CEO pay, and therefore on the relative merits of different organizational forms.…”