Efficient structure of organization with heterogeneous workers

Abstract This paper studies the problem of organizational design in a setting where workers differ in their abilities and every worker has to be monitored to prevent shirking. The need for monitoring workers generates a hierarchical structure in an organization, which can be represented as a rooted tree. The value of an organization is determined by the wage cost, the total number of productive tasks carried out, and the length of the chain of supervision in the organizational hierarchy. In this setting, we construct and characterize an efficient structure of hierarchy which maximizes the value of the organization. In addition, we show that a hierarchy with an optimal size has the form of a balanced rooted tree.