INCENTIVES AND LOSS OF CONTROL IN AN OPTIMAL HIERARCHY

This paper studies incentives and loss of control in a hierarchy model which combines and generalizes the models of Williamson, Calvo-Wellis z and Keren-Levhari. In our model of the hierarchy, the levels of effo rt from managers and workers, the wage scales, the span of control and , in particular, the total number of tiers are all endogenous. Using o ptimal control techniques, we show that in the optimal hierarchy the w age scales and effort levels decrease as one moves down the hierarchy. As the hierarchy expands with no technological progress, workers exer t less effort and are paid less, top managers work harder and are paid more and the wage distribution becomes increasingly skewed.