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Optimal Coordination in Hierarchies

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  • Andrea Patacconi
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    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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    Bibliographic Info

    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: 01 Jun 2005
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    Handle: RePEc:oxf:wpaper:238

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    Related research

    Keywords: Coordination; Hierarchy; Duplication; Delay; Information Processing;

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    1. Mathias Dewatripont & Patrick Bolton, 1994. "The firm as a communication network," ULB Institutional Repository 2013/9595, ULB -- Universite Libre de Bruxelles.
    2. Gary S. Murphy Becker & Kevin M., 1992. "The Division of Labor, Coordination Costs, and Knowledge," University of Chicago - George G. Stigler Center for Study of Economy and State 79, Chicago - Center for Study of Economy and State.
    3. Raghuram G. Rajan & Julie Wulf, 2006. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 759-773, November.
    4. Milton Harris & Artur Raviv, 2002. "Organization Design," Management Science, INFORMS, vol. 48(7), pages 852-865, July.
    5. Dimitri Vayanos, 2003. "The decentralization of information processing in the presence of interactions," LSE Research Online Documents on Economics 452, London School of Economics and Political Science, LSE Library.
    6. Dalia Marin & Thierry Verdier, 2003. "Globalization and the "New Entreprise"," DELTA Working Papers 2003-31, DELTA (Ecole normale supérieure).
    7. Philippe Jehiel, 1999. "Information Aggregation and Communication in Organizations," Management Science, INFORMS, vol. 45(5), pages 659-669, May.
    8. Gifford, Sharon, 1992. "Allocation of entrepreneurial attention," Journal of Economic Behavior & Organization, Elsevier, vol. 19(3), pages 265-284, December.
    9. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
    10. Athey, Susan, 2002. "Monotone Comparative Statics Under Uncertainty," Scholarly Articles 3372263, Harvard University Department of Economics.
    11. Beggs, A., 2000. "Queues and Hierarchies," Economics Series Working Papers 9934, University of Oxford, Department of Economics.
    12. Oliver Hart & John Moore, 2005. "On the Design of Hierarchies: Coordination versus Specialization," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 675-702, August.
    13. 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.
    14. Dessein, Wouter & Santos, Jesus, 2003. "The Demand for Coordination," CEPR Discussion Papers 4096, C.E.P.R. Discussion Papers.
    15. Michael Keren & David Levhari, 1979. "The Optimum Span of Control in a Pure Hierarchy," Management Science, INFORMS, vol. 25(11), pages 1162-1172, November.
    16. Susan Athey, 2002. "Monotone Comparative Statics Under Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 187-223, February.
    17. Prat, Andrea, 1997. "Hierarchies of Processors with Endogenous Capacity," Journal of Economic Theory, Elsevier, vol. 77(1), pages 214-222, November.
    18. VAN ZANDT, Timothy, 1995. "Continuous Approximations in the Study of Hierarchies," CORE Discussion Papers 1995002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    19. Julio J. Rotemberg, 1999. "Process- Versus Function-Based Hierarchies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 453-487, December.
    20. Van Zandt, Timothy, 2004. "Balancedness of Real-Time Hierarchical Resource Allocation," CEPR Discussion Papers 4276, C.E.P.R. Discussion Papers.
    21. 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.
    22. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
    23. Keren, Michael & Levhari, David, 1989. "Decentralization, aggregation, control loss and costs in a hierarchical model of the firm," Journal of Economic Behavior & Organization, Elsevier, vol. 11(2), pages 213-236, March.
    24. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
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