The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization PRELIMINARY AND INCOMPLETE

It has been documented that firm hierarchies are flattening. CEO span of control has increased significantly over time while the number of levels in the hierarchy has declined. In this paper, we establish a causal effect of competition, from trade liberalization and changing trade costs on various characteristics of organizational design. We exploit a unique panel dataset of large US firms with detailed information on firm hierarchies and managerial positions over the period 1986-1999. We find that increasing foreign competition leads to flatter firms: (i) firms reduce the number of positions between the CEO and division managers, and (ii) increase the number of positions reporting directly to the CEO. We also find that competition increases performance-based pay for division managers and affects the reporting relationships of senior officers including Chief Financial Officers and Legal Counsel. The results are generally consistent with the explanation that intensified competition increases the value of delegation and fast decision making, causing multidivisional firms to redesign their organizations to be more adaptive to local information while simultaneously coordinating activities across divisions. Corresponding author: Maria Guadalupe, 3022 Broadway, Uris Hall 624, New York NY 10025; p: 212 854 6176; e: [email protected]