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Organizational Design and Environmental Volatility

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  • Heikki Rantakari

Abstract

I investigate the link between a firm's operating environment and its preferred organizational structure, as determined by the allocation of decision rights, the compensation structure of its managers, and the underlying configuration of its productive assets. The results are broadly consistent with the received wisdom regarding this fit. Firms operating in volatile environments are characterized by loosely integrated operations, decentralized decision making, and a pay structure that reflects primarily division-level performance, whereas firms operating in stable environments are characterized by tightly integrated operations, typically centralized decision making, and a pay structure that is closely tied to firm-level performance. The results also provide some new insights and predictions. In particular, the results show how decreases in the cost of information increase the preference for decentralization and less integrated operations and highlight the importance of accounting for the interdependencies among the design parameters themselves in maximizing organizational performance. The Author 2011. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Heikki Rantakari, 2013. "Organizational Design and Environmental Volatility," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(3), pages 569-607, June.
    • Handle: RePEc:oup:jleorg:v:29:y:2013:i:3:p:569-607
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    File URL: http://hdl.handle.net/10.1093/jleo/ewr015
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    Cited by:

    1. Laura Alfaro & Nicholas Bloom & Paola Conconi & Harald Fadinger & Patrick Legros & Andrew F. Newman & Raffaella Sadun & John Van Reenen, 2017. "Come Together: Firm Boundaries and Delegation," Harvard Business School Working Papers 18-051, Harvard Business School, revised May 2019.
    2. Dessein, Wouter & Lo, Desmond (Ho-Fu) & Minami, Chieko, 2019. "Coordination and Organization Design: Theory and Micro-evidence," CEPR Discussion Papers 13938, C.E.P.R. Discussion Papers.
    3. Luis Garicano & Luis Rayo, 2016. "Why Organizations Fail: Models and Cases," Journal of Economic Literature, American Economic Association, vol. 54(1), pages 137-192, March.
    4. Schmidbauer, Eric, 2017. "Multi-period competitive cheap talk with highly biased experts," Games and Economic Behavior, Elsevier, vol. 102(C), pages 240-254.
    5. Li, Mangmang & Cao, Yuqiang & Lu, Meiting & Wang, Hongjian, 2021. "Political uncertainty and allocation of decision rights among business groups: Evidence from the replacement of municipal officials," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    6. Liu, Shuo & Migrow, Dimitri, 2022. "When does centralization undermine adaptation?," Journal of Economic Theory, Elsevier, vol. 205(C).
    7. Siguang Li & Xi Weng, 2017. "Random Authority," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(1), pages 211-235, February.
    8. Wouter Dessein & Andrea Galeotti & Tano Santos, 2016. "Rational Inattention and Organizational Focus," American Economic Review, American Economic Association, vol. 106(6), pages 1522-1536, June.
    9. Tran, Hai & Turkiela, Jason, 2020. "The powers that be: Concentration of authority within the board of directors and variability in firm performance☆," Journal of Corporate Finance, Elsevier, vol. 60(C).
    10. Petros G. Sekeris & Dimitrios Xefteris, 2021. "Strategic Delegation to Organizations," Journal of Industrial Economics, Wiley Blackwell, vol. 69(4), pages 900-922, December.
    11. Lou, Zhukun & Zhu, Mingyang, 2021. "Decision rights allocation and innovation: Evidence from China's listed business groups," Finance Research Letters, Elsevier, vol. 39(C).
    12. Eric Schmidbauer, 2016. "Multi-period competitive cheap talk with very biased experts," Working Papers 2016-04, University of Central Florida, Department of Economics.

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