The Hierarchical Structure of the Firm: A Geometric Perspective

This paper incorporates hierarchical structure into the neoclassical theory of the firm. Firms are hierarchical in two respects: the organization of workers in production and the wage structure. The firm’s hierarchy is represented as a sector of a circle, where the radius represents the hierarchy’s height, the width of the sector represents the breadth of the hierarchy at a given height, and the angle of the sector represents span of control. A perfectly competitive firm chooses height and width, as well as capital, in order to maximize profit. We analyze the short run and long run impact of changes in scale economies, input substitutability, and input and output prices on the firm’s hierarchical structure. We find that the firm grows as the specialization of its workers increases or as its output price increases relative to input prices. The effect of changes in scale economies is contingent on the price of output. The model also brings forth an analysis of wage inequality within the firm, which is found to be independent of the firm’s hierarchical organization of workers, and only depends on the firm’s wage schedule.