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Optimal Coordination in Hierarchies

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Author Info
Andrea Patacconi
Abstract

This paper studies the optimal allocation of coordination responsibilities in organizations where duplication of effort is a serious concern. The planner`s objective is to minimize a weighted average of the wage bill and the cost of delay. The paper provides conditions under which, in balanced hierarches, communication effort is increasing and the span of control is decreasing as one travels up the hierarchy, with equalities holding if wages are negligible relative to the weight attached to the cost of delay. The analysis suggests that concerns for fast decision-making may be key in explaining the recent trend towards empowerment in firms. Several variants of the basic model are studied, including one focusing on communicative skills and another in which, as urgency increases, the optimal span of control increases and the hierarchy flattens. Evidence supporting these results is discussed.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 238.

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Date of creation: 2005
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Handle: RePEc:oxf:wpaper:238

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Keywords: Coordination Hierarchy Duplication Delay Information Processing

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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    Other versions:
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  12. Dimitri Vayanos, 2003. "The Decentralization of Information Processing in the Presence of Interactions," Review of Economic Studies, Blackwell Publishing, vol. 70(3), pages 667-695, 07. [Downloadable!] (restricted)
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  14. Timothy Van Zandt, 1995. "Continuous Approximations in the Study of Hierarchies," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 575-590, Winter. [Downloadable!] (restricted)
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  15. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September. [Downloadable!] (restricted)
  16. Meagher, Kieron J., 2003. "Generalizing incentives and loss of control in an optimal hierarchy: the role of information technology," Economics Letters, Elsevier, vol. 78(2), pages 273-280, February. [Downloadable!] (restricted)
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  22. Michael Keren & David Levhari, 1983. "The Internal Organization of the Firm and the Shape of Average Costs," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 474-486, Autumn. [Downloadable!] (restricted)
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