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Centralization versus Decentralization as a Risk-Return Trade-Off

  • Alessandra Arcuri
  • Giuseppe Dari-Mattiacci

This paper characterizes the choice between centralization and decentralization as a risk-return trade-off and examines it in a model that integrates ideas from committee decision-making and portfolio theories. Centralization, by pooling expertise, rarely yields erroneous decisions; however, when it fails, the consequences are global. In contrast, in a decentralized system, erroneous decisions are more frequent, but their consequences are locally confined. We assess the relative desirability of (de-)centralization in various scenarios with independent versus interdependent risks. We further discuss the robustness of the model and the relevance of our results for policymaking. (c) 2010 by The University of Chicago. All rights reserved.

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File URL: http://dx.doi.org/10.1086/599623
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Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 53 (2010)
Issue (Month): 2 (05)
Pages: 359-378

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Handle: RePEc:ucp:jlawec:v:53:y:2010:i:2:p:359-378
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