When Does Coordination Require Centralization?
Authors: Alonso, Ricardo; Dessein, Wouter; Matouschek, Niko
Source: The American Economic Review, Volume 98, Number 1, March 2008 , pp. 145-179(35)
Publisher: American Economic Association
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.
Document Type: Research Article
Publication date: March 2008
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