Toward a Rational Theory of Decentralization: Another View

This paper observes that analyses of the process of decentralization often fail to recognize that constraints are imposed by the nature of the organization being examined. In particular, the analysis of an organization producing economic goods can be misleading if applied, without qualification, to organizations producing government goods. Taking as its point of departure the analysis of an economic organization, the article focuses on three salient differences in the operation of the two types of organizations. First, in the economic organization both its personnel and its clients agree on the items produced. In the government organization there may be substantial disagreement about what should be produced. Second, in the economic organization the information flows will generally be of a compact numerical form. In the government organization the information flow will often not take a numerical form. Information transmission will be less dense and, therefore, more expensive. Third, in the economic organization prices act as “sufficient statistics,†which completely measure the organization's performance of its objective (profit maximization). For many government organizations no such sufficient statistics exist.