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Costly Communication and Delegation in Multiple‐Division Firms

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  • Jeffrey A. Yost

Abstract

This paper examines the costs and benefits of delegated decision making in a multi‐division firm. The delegation versus centralization decision hinges on the trade‐off between: (1) the costs of communication between divisions of the firm and the firm's headquarters under centralized decision making; and (2) gains from closer controls under centralized control. The performance of the two organizational designs are examined in a stylized principal‐agent model with the firm's central management represented by the principal and two divisions of the firm by two self‐interested agents. In a centralized scheme the agents report private information to the center who then sets production quotas and co‐ordinates the agents' production. Under delegation, the production and co‐ordination decisions are left to the agents. Central management simply rewards the agents based on observed performance. The advantages of centralization over delegation are shown to diminish when the correlation between the agents' private information approaches the polar extremes of perfect correlation and statistical independence.

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  • Jeffrey A. Yost, 1993. "Costly Communication and Delegation in Multiple‐Division Firms," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 2(4), pages 305-317, December.
    • Handle: RePEc:wly:isacfm:v:2:y:1993:i:4:p:305-317
    DOI: 10.1002/j.1099-1174.1993.tb00049.x
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    1. Gary V. Howorka & Lorien A. Anderson & K. Michael Goul & Michael Hine, 1995. "A Computational Model of Coordination for the Design of Organizational Decision Support Systems," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 4(1), pages 43-70, March.

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