Complementarities in Organizational Design: Empirical Evidence from the New Economy

Abstract

Economic theory suggests that there are complementarities between the various components of a firm's organizational design (Milgrom and Roberts (1992)). With the exception of Nagar (2002) which examines the joint determination of two components of the management control system, incentive compensation and delegation, there is very little empirical research to support this theorized structure of the firm. We extend Nagar (2002) by examining the complementarities across all three components of the firm's organizational architecture as identified by Jensen and Meckling (1976) and Brickley, Smith, and Zimmerman (1995): performance measurement, incentive compensation, and the allocation of decision rights. We develop a structural equation model to test the hypothesis that the three elements are interdependent for a sample of business-to-consumer Internet firms and find strong evidence to support the conjecture that the three components of the firms' organizational design are interdependent. We also provide evidence on the role of knowledge specificity, firm strategy, span of control, and various ownership and governance characteristics in the design of the firm's organizational architecture.

Keywords: Complementarity, Management Control System, Organizational Design, Internet, Incentive Compensation, Delegation, Performance Evaluation

JEL Classification: M40, M46, D23, G30, J33, L22, M20, M52