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Network Organizations

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  • Fernando Vega-Redondo

Abstract

It is common to define a network organization as one that is fast and flexible in adapting to changes in the underlying environment. But besides the short-run advantages of adaptability, fast changes in the structure of the organization can also be detrimental in the longer run. This happens, in particular, because agents need to depend widely on that structure to channel appropriately (and thus speed up) search. I discuss the trade-off between adaptability and structural stability in a changing environment where, if the structure of the organization adjusts, information on the exact nature of the change becomes known only with some lag. The main conclusion obtained is that, as environment becomes more volatile, the optimal mode of the organization sharply switches from being totally flexible to being completely rigid, i.e. no intermediate configurations are essentially ever optimal. This has stark implications on the dichothomy of stability versus change that has been highlighted by recent organization literature.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/09.

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Date of creation: 2008
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Handle: RePEc:eui:euiwps:eco2008/09

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  1. 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.
  2. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
  3. Bolton, Patrick & Dewatripont, Mathias, 1994. "The Firm as a Communication Network," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 809-39, November.
  4. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
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