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On the Design of Hierarchies: Coordination versus Specialization

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  • Oliver Hart
  • John Moore

Abstract

We develop a model of hierarchies based on the allocation of authority. A firm's owners have ultimate authority over a firm's decisions, but they have limited time or capacity to exercise this authority. Hence owners must delegate authority to subordinates. However, these subordinates also have limited time or capacity and so further delegation must occur. We analyze the optimal chain of command given that different agents have different tasks: some agents are engaged in coordination and others in specialization. Our theory throws light on the nature of hierarchy, the optimal degree of decentralization, and the boundaries of the firm.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 113 (2005)
Issue (Month): 4 (August)
Pages: 675-702

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Handle: RePEc:ucp:jpolec:v:113:y:2005:i:4:p:675-702

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References

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  1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  2. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Michael D. Hurd & James P. Smith, 2001. "Anticipated and Actual Bequests," NBER Chapters, in: Themes in the Economics of Aging, pages 357-392 National Bureau of Economic Research, Inc.
  4. Michael Keren & David Levhari, 1979. "The Optimum Span of Control in a Pure Hierarchy," Management Science, INFORMS, vol. 25(11), pages 1162-1172, November.
  5. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  6. Bolton, P. & Ferrel, J., 1988. "Decentralization, Deplication And Delay," Working Papers e-88-49, Hoover Institution, Stanford University.
  7. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, February.
  9. David C. King & Richard J. Zeckhauser, 1999. "Congressional Vote Options," NBER Working Papers 7342, National Bureau of Economic Research, Inc.
  10. Argyres, Nicholas S., 1995. "Technology strategy, governance structure and interdivisional coordination," Journal of Economic Behavior & Organization, Elsevier, vol. 28(3), pages 337-358, December.
  11. Robert E. Lipsey, 1999. "Foreign Production by U.S. Firms and Parent Firm Employment," NBER Working Papers 7357, National Bureau of Economic Research, Inc.
  12. Van Zandt, Timothy, 1999. "Real-Time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 633-58, July.
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  1. Against ambition
    by chris dillow in Stumbling and Mumbling on 2008-03-02 12:51:38
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