Information and trust in hierarchies

This paper examines how information costs and congruence in the objectives of collaborators in production jointly affect the equilibrium number of managers and employees in an economy where individuals with different endowments of skills make occupational choices. We use the ratio of employees per manager, i.e. the average span of control (ASC) in the equilibrium, as a summary of how production is organized in the economy. The theory predicts that generalized trust, favoring congruence in objectives, will imply higher ASC in the equilibrium, while the intensity of use of information and communication technologies that lowers information costs has an undetermined effect on the equilibrium span of control. The empirical test of the hypotheses, with data from the Spanish regions, confirms that social capital-trust has a positive effect on the average span of control, while the sign of the effect of information-communication capital varies with the kind of information assets: communications, software or hardware.

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