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American Economic Review: Vol. 98 No. 1 (March 2008)

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When Does Coordination Require Centralization?

Article Citation

Alonso, Ricardo, Wouter Dessein, and Niko Matouschek. 2008. "When Does Coordination Require Centralization?" American Economic Review, 98(1): 145-79.

DOI: 10.1257/aer.98.1.145

Abstract

This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multidivisional organization in which decisions must be adapted to local conditions but also coordinated with each other. Information about local conditions is dispersed and held by self-interested division managers who communicate via cheap talk. The only available formal mechanism is the allocation of decision rights. We show that a higher need for coordination improves horizontal communication but worsens vertical communication. As a result, decentralization can dominate centralization even when coordination is extremely important relative to adaptation. (JEL D23, D83, L23, M11)

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Authors

Alonso, Ricardo (U Southern CA)
Dessein, Wouter (U Chicago)
Matouschek, Niko (Northwestern U)

JEL Classifications

D23: Organizational Behavior; Transaction Costs; Property Rights
D83: Search; Learning; Information and Knowledge; Communication; Belief
L23: Organization of Production
M11: Production Management


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