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When Does Coordination Require Centralization?

  • Ricardo Alonso
  • Wouter Dessein
  • Niko Matouschek

This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multidivisional organization in which decisions must be adapted to local conditions but also coordinated with each other. Information about local conditions is dispersed and held by self-interested division managers who communicate via cheap talk. The only available formal mechanism is the allocation of decision rights. We show that a higher need for coordination improves horizontal communication but worsens vertical communication. As a result, decentralization can dominate centralization even when coordination is extremely important relative to adaptation. (JEL D23, D83, L23, M11)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.1.145
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File URL: http://www.aeaweb.org/aer/data/mar08/20060806_app.pdf
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 145-79

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:145-79
Note: DOI: 10.1257/aer.98.1.145
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