Organizational Form and the Market for Talent

This paper brings together the market for products, the market for talent, and firms' organizational form. While the organizational design determines the allocation of blame and fame within the firm, the value of a good reputation depends on the market structure. Consequently, the market structure dictates the optimal organizational design. If competition becomes tougher and the market thicker, transparent firms decentralize while non-transparent firms concentrate control, transparency itself is improved, corporations switch from U-form to M-form, and the turnover of managers increases. The model rationalizes recent trends in both executive pay and organizational design.