Optimal Hierarchies in Firms: a Theoretical Model

A normative economic model of management hierarchy design in firms is proposed. The management hierarchy is sought to minimize the running costs. Along with direct maintenance expenses these costs include wastes from the loss of control. The results comprise 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.