A normative economic model of management hierarchy design in firms is proposed. We seek for the management hierarchy that minimizes the running costs. Along with direct maintenance expenses these costs include wastes from the loss of control. The results include the analytic expressions for the optimal hierarchy attributes: span of control, headcount, efforts distribution, wages differential, etc, as functions of exogenous parameters. They allow analyzing the impact of environment parameters on a firm’s size, financial results, employees’ wages and shape of hierarchy. The detailed analysis of this impact can help drawing up policy recommendations on rational bureaucracy formation in firms.
The research is supported by the grant 07-07-0078-a of Russian Foundation for Basic Research.