American Economic Review Vol. 98 No. 1 2008

When Does Coordination Require Centralization?

Ricardo Alonso¹; Wouter Dessein²; Niko Matouschek³

¹ Marshall School of Business, University of Southern California, 3670 Trousdale Parkway, Los Angeles, CA 90089. · ² Graduate School of Business, University of Chicago, 5807 South Woodlawn Ave., Chicago, IL 60637. · ³ Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208.

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.

DOI

10.1257/aer.98.1.145

Volume

98

Issue

1

Pages

145-179

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

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