When Does Coordination Require Centralization?
American Economic Review
vol. 98,
no. 1, March 2008
(pp. 145-79)
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)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.98.1.145Additional Materials
JEL Classification
- D23 Organizational Behavior; Transaction Costs; Property Rights
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- L23 Organization of Production
- M11 Production Management