The Problems and Promise of Hierarchy: Voice Rights and the Firm

Abstract

The firm's continued importance for coordinating economic activity is puzzling given that (1) economists have not demonstrated that the greater alignment of effort they expect from hierarchical coordination overcomes the reduction in employee effort created by "low-powered" incentives, (2) employee effort is further threatened by the alienating effects of hierarchical control, and (3) firms, as we show, are necessarily hierarchical. Why, then, do firms dominate the capitalist economy? Our theory is rooted in a more subtle set of rights that is also intrinsic to the firm hierarchy: "voice rights" (who can speak within and on behalf of the firm). Control of voice is crucial for endowing the firm with a capacity that cannot be acquired by a mere "nexus" of contractors: it can become a reliable and accountable actor. This, in turn, gives the firm three necessary (if insufficient) ingredients for creating strong identification with the collective enterprise. Our theory thus suggests why firms remain important despite their inherent limitations and why some firms are marked by alienation and perfunctory performance while others are marked by strong identification and consummate performance.