Technology driven organizational structure of the firm

We model a corporate firm with a variable internal organizational structure that adapts to various degrees of technological cooperation. The entrepreneur determines the organizational structure that maximizes profits under participation constraints. Wages are determined by an internal cooperative pay-system, constrained by external reservation wages. We show that closer cooperation between production-workers results in a shorter organization with enhanced positional wages relative to the external benchmarks. The corporate firm is embedded in a competitive market economy that determines reservation wages and market prices. We also allow for more general technologies and provide conditions guaranteeing a finite optimal size of the firm. We thank Rob Gilles, Dolf Talman and an anonymous referee for their comments on a previous version of this paper.