The Creation of A Middle-Management Level by Entrepreneurial Ventures: Testing Economic Theories of Organizational Design

Authors


  • We gratefully acknowledge the support of the PRIN fund (contract no. 2006132439_002). We are indebted to the thoughtful suggestions of the anonymous co-editor and referee that substantially improved the paper. We also thank Tom Åstebro, Bo Carlsson, Elena Cefis, Annalisa Cristini, Dirk Czarnitzki, Marco Delmastro, Federico Etro, Riccardo Leoni, Tammy Madsen, Pedro Ortin, Cristina Rossi Lamastra, Christian Serarols, Erol Taymaz, Sidney Winter, participants in the 2007 EARIE conference, 2008 SMS Conference, 2009 IIOC Conference, DRUID 2009 Summer Conference, and seminars held at University of Bergamo, UAB, KUL, and Politecnico di Milano for helpful comments. We are also grateful to Fabio Bertoni for valuable assistance in running Monte Carlo simulations. Obviously, responsibility for any errors lies solely with the authors.

Abstract

Why do some entrepreneurial ventures rapidly switch from flat organizations composed of owner-managers and line workers to deeper organizations that also include a middle-management level? The aim of this paper is to investigate this issue and to test the predictions of different streams of the theoretical economic literature on organizational design. We use the estimates of survival data analysis models to examine the determinants of the addition of a middle-management level to the corporate hierarchy of a large sample of Italian high-tech entrepreneurial ventures. The econometric results lend support to the view proposed by the “information processing” stream that the information overload problems engendered by a highly competitive and unpredictable business environment are key drivers of the creation of a middle-management level. Moreover, in accordance with the “knowledge hierarchy” literature, the greater the human capital of firms’ owner-managers, the more likely the appointment of a middle manager. Conversely, we fail to provide evidence consistent with theoretical predictions inspired by the “decentralization of incentives” stream. Lastly, transaction costs and adverse selection problems in the managerial labour market are found to have a large negative effect on the likelihood of the appointment of middle managers.

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