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Optimal hierarchies with diverse decision-makers

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  • Puschke, Kerstin

Abstract

We analyze the optimal decision-making hierarchy in an organization when decision-makers of limited liability have preferences conflicting with the organization’s objective and exert externalities on their counterparts. In a horizontal hierarchy, every decision is made by a different agent. In a vertical hierarchy, one agent is in charge of all decisions. Only this agent is incentivized. This advantage is outweighed if there is a horizontal hierarchy so that the decision-makers’ preferences are close to the organization’s objective with respect to the decision they are in charge of but far from the organization’s objective for the other decisions. --

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Bibliographic Info

Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2007/10.

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Date of creation: 2007
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Handle: RePEc:zbw:fubsbe:200710

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Keywords: Authority; Decision Rights; Incomplete Contracts;

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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Eric Maskin & Yingyi Qian & Chenggang Xu, 1997. "Incentives, Information, and Organizational Form," Working Papers 97034, Stanford University, Department of Economics.
  3. Eyal Winter, 2003. "Incentives and Discrimination," Discussion Paper Series dp313, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  4. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, vol. 91(2), pages 200-205, May.
  5. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Schmitz, Patrick W., 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," CEPR Discussion Papers 5145, C.E.P.R. Discussion Papers.
  7. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
  8. Yingyi Qian & Gerard Roland & Chenggang Xu, 2006. "Coordination and Experimentation in M-Form and U-Form Organizations," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 366-402, April.
  9. Dessein, Wouter & Garicano, Luis & Gertner, Robert, 2007. "Organizing for Synergies," CEPR Discussion Papers 6019, C.E.P.R. Discussion Papers.
  10. Helmut Bester, . "Externalities, Communication and the Allocation of Decision Rights," Papers 027, Departmental Working Papers.
  11. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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