Generalizing incentives and loss of control in an optimal hierarchy: the role of information technology

How do changes in information technology affect a firm’s organization? To answer this question I extend the existing literature on incentives and control in hierarchies to include: (i) a varying management technology; and (ii) endogenous hierarchy size. The generalization produces the new prediction that improvements in information technology produce larger hierarchies. This prediction is confirmed by published historical analysis of the emergence of the modern corporation.