Institutional Complexity and Managerial Efficiency: A Simple Model
This paper analyzes the relation between resource inputs and managerial effort in firms. The discussion is motivated by a theoretical model that suggests that firms use managerial effort as a substitute of capital resources in the production process. In this framework, different levels of effort are always optimal decisions given its relative cost. Thus, the relatively higher effort exerted by small (compared to big) firms is not a consequence of hidden information or incentive problems in the organization but it is a optimal decision of small firms to offset capital market restrictions. Managers in big firms, on the other hand, are not obliged to offer their maximum personal effort given that it can be more easily substituted by capital resources in the production process.
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