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Organization Design

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Author Info

  • Milton Harris

    ()
    (Graduate School of Business, University of Chicago, Chicago, Illinois 60637)

  • Artur Raviv

    ()
    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

Abstract

This paper attempts to explain organization structure based on optimal coordination of interactions among activities. The main idea is that each manager is capable of detecting and coordinating interactions only within his limited area of expertise. Only the CEO can coordinate company wide interactions. The optimal design of the organization trades off the costs and benefits of various configurations of managers. Our results consist of classifying the characteristics of activities and managerial costs that lead to the matrix organization, the functional hierarchy, the divisional hierarchy, or a fiat hierarchy. We also investigate the effect of changing the costs of various managers on the nature of the optimal organization, including the extent of centralization.

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File URL: http://dx.doi.org/10.1287/mnsc.48.7.852.2821
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 48 (2002)
Issue (Month): 7 (July)
Pages: 852-865

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Handle: RePEc:inm:ormnsc:v:48:y:2002:i:7:p:852-865

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Keywords: organization design; hierarchies; decentralization; U-form; M-form; internal organization;

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References

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  1. Oliver Hart & John Moore, 1999. "On the Design of Hierarchies: Coordination Versus Specialization," NBER Working Papers 7388, National Bureau of Economic Research, Inc.
  2. Mathias Dewatripont & Patrick Bolton, 2004. "The firm as a communication network," ULB Institutional Repository 2013/9599, ULB -- Universite Libre de Bruxelles.
  3. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  4. Qian, Yingyi, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 527-44, July.
  5. Oliver Hart & John Moore, 1999. "On the design of hierarchies: coordination versus specialization," LSE Research Online Documents on Economics 19340, London School of Economics and Political Science, LSE Library.
  6. Singh, Nirvikar, 1985. "Monitoring and Hierarchies: The Marginal Value of Information in a Principal-Agent Model," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 599-609, June.
  7. Raaj Kumar Sah & Joseph E. Stiglitz, 1984. "The Architecture of Economic Systems: Hierarchies and Polyarchies," NBER Working Papers 1334, National Bureau of Economic Research, Inc.
  8. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
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Citations

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Cited by:
  1. Inderst, Roman & Mueller, Holger M & Wärneryd, Karl, 2002. "Distributional Conflict in Organisations," CEPR Discussion Papers 3315, C.E.P.R. Discussion Papers.
  2. Dessein, Wouter & Garicano, Luis & Gertner, Robert, 2007. "Organizing for Synergies," CEPR Discussion Papers 6019, C.E.P.R. Discussion Papers.
  3. Andrea Patacconi, 2005. "Optimal Coordination in Hierarchies," Economics Series Working Papers 238, University of Oxford, Department of Economics.
  4. Chi, Tailan & Nystrom, Paul C. & Kircher, Philipp, 2004. "Knowledge-based resources as determinants of MNC structure: tests of an integrative model," Journal of International Management, Elsevier, vol. 10(2), pages 219-238.
  5. Moreira, Humberto Ataíde & Costa, Cristiano Machado & Ferreira, Daniel Bernardo Soares, 2004. "Biased managers, organizational design, and incentive provision," Economics Working Papers (Ensaios Economicos da EPGE) 525, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  6. Martin G. Kocher & Ganna Pogrebna & Matthias Sutter, . "The Determinants of Managerial Decisions Under Risk," Working Papers 2008-04, Faculty of Economics and Statistics, University of Innsbruck.
  7. M. Idriss GHODBANE, 2002. "Centralization Versus Decentralization in Credit Lending," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2002002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  8. Jeremy C. Stein, 2000. "Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms," NBER Working Papers 7705, National Bureau of Economic Research, Inc.
  9. Fabio Landini & Antonio Nicolò & Marco Piovesan, 2013. "The Hidden Cost of Specialization," IFRO Working Paper 2013/9, University of Copenhagen, Department of Food and Resource Economics.
  10. Carlin, Bruce Ian & Chowdhry, Bhagwan & Garmaise, Mark J., 2012. "Investment in organization capital," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 268-286.
  11. Carroll, Timothy N. & Hunter, Starling D., 2006. "Organizational Design, Organizational Learning, And The Market Value Of The Firm," Working papers 30608, Massachusetts Institute of Technology (MIT), Sloan School of Management.

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