Skill Obsolescence and Flat Hierarchies : Creating Incentives for Skill Diversification

This paper explores the internal organization of production in technology firms. We propose that flat hierarchical organizations is the technology-intensive firm's response to the need for worker skill diversification in an environment where skills become obsolete very rapidly. If it is efficient for firms to provide investment in skill-diversification due to risk of obsolescence, the presence of promotion ladders in traditional vertically organized firms creates too high an incentive among firms to provide specialized investment which improves the promotion probability for workers. In such situations firms may adopt organizational forms with flat hierarchies in order to induce investment in skill diversification