Power Inside the Firm and the Market: A General Equilibrium Approach

Recent years have witnessed an enormous amount of reorganization of
the corporate sector in the US and in Europe. This paper examines
the role of market competition for this trend in corporate
reorganization. We find that at intermediate levels of competition
the CEO of the corporation decides to have less power inside the
firm and to delegate control to lower levels of the firms’
hierarchy. Thus, workers empowerment and the move to flatter firm
organizations emerge as an equilibrium when competition is not too
tough and not too weak. The model predicts merger waves or waves of
outsourcing when countries become more integrated into the world
economy as the corporate sector reorganizes in response to an
increase in international competition.