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Implications of Resource Directive Allocation Models for Organizational Design

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  • James R. Freeland

    (Standford University)

  • Jeffrey H. Moore

    (Standford University)

Abstract

This paper develops theoretical results, for a class of coordination mechanisms for resource allocation in decentralized firms, using as a model the decomposition of linear programs. Of the two pure decentralized allocation mechanisms (price-directive and resource-directive), resource-directive mechanisms, based in concept upon rationing or budgeting procedures, have received less attention in the literature. This paper focuses on these mechanisms and reports that under rather mild conditions the use of the plausible and economically appealing rule of allocating a global resource so as to equalize its marginal value over alternate uses is almost surely doomed to failure. In particular it is found that (1) resource-directive decompositions induce a kind of structural degeneracy in the decentralized divisions; (2) the amount of degeneracy increases with the number of divisions and the number of scarce global resources; and (3) degeneracy "seeks its own level" in that degeneracies spread over the divisions. The implication of these results for those interested in organizational design is that caution should be observed in utilizing such a rule as equalizing marginal values, and that more complicated and costly procedures for effecting resource allocation may be required. Finally, some symmetries between price-directive and resource-directive mechanisms are summarized.

Suggested Citation

  • James R. Freeland & Jeffrey H. Moore, 1977. "Implications of Resource Directive Allocation Models for Organizational Design," Management Science, INFORMS, vol. 23(10), pages 1050-1059, June.
  • Handle: RePEc:inm:ormnsc:v:23:y:1977:i:10:p:1050-1059
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    File URL: http://dx.doi.org/10.1287/mnsc.23.10.1050
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    Cited by:

    1. John W. Boudreau, 2004. "50th Anniversary Article: Organizational Behavior, Strategy, Performance, and Design in Management Science," Management Science, INFORMS, vol. 50(11), pages 1463-1476, November.
    2. Antreas D. Athanassopoulos, 1998. "Decision Support for Target-Based Resource Allocation of Public Services in Multiunit and Multilevel Systems," Management Science, INFORMS, vol. 44(2), pages 173-187, February.

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