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Rationality and Society
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ON CONTROL LOSSES IN HIERARCHIES

A SYNTHESIS

Saikat Datta

This paper surveys the recent economics literature which tries to model loss of control in hierarchies. When supervisors can monitor efforts of their subordinates, it is not very difficult for the firm to grow indefinitely. If direct monitoring of effort is not possible, and supervisors have to be compensated based on the quality of production on the shop floor, then it is more difficult for the firm to grow beyond a certain size. However, the possibilities of collusion between supervisors and subordinates create enough strain on the firm to force it to be of finite size. Most models where supervisors do planning or coordinating activities tend to show higher average costs for larger firms.

Key Words: collusion • control loss • firm size • hierarchy • supervision

Rationality and Society, Vol. 8, No. 4, 387-412 (1996)
DOI: 10.1177/104346396008004003
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