Firm Structure and Internal Market Power

Abstract: This paper explores how firm organizational structure influences internal market power and wage dispersion across firms occupational layers. In complex firms, talent is distributed across multiple layers, from lower-level workers whose effective productivity primarily depends on their individual skills, to top-level managers whose productivity significantly impacts the entire firm. Recognizing this, firms may optimally choose wage structures featuring higher compensation at upper layers, reflecting managers' broader influence on overall productivity, while potentially imposing markdowns on lower-level positions. By explicitly modeling these internal firm structures, we analyze how such mechanisms shape within-firm wage inequality, internal allocation of talent, and overall productivity. Additionally, the framework sheds light on how internal reallocation interacts with external labor market pressures.