When Does Coordination Require Centralization?
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- 1 March 2008
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 98 (1) , 145-179
- https://doi.org/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)Keywords
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