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Optimal Hierarchies with Diverse Decision-Makers

Author

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  • Kerstin Puschke

    (Free University of Berlin, Department of Economics)

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.

Suggested Citation

  • Kerstin Puschke, "undated". "Optimal Hierarchies with Diverse Decision-Makers," Papers 034, Departmental Working Papers.
    • Handle: RePEc:bef:lsbest:034
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    File URL: http://userpage.fu-berlin.de/%7Elsbester/papers/puschke_diverse.pdf
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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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