Robust Organization Design

This paper presents a model of how organizations develop complex products. Decentralizing the process into autonomous units increases the potential value of production but raises the risk of miscoordination. The organization coordinates the process through costly and imperfectly reliable coordination channels. It optimally creates redundancy in these channels, thereby determining the robustness of the process to miscoordination. The incentive to invest in robustness strengthens as long as returns to decentralization are increasing. Hence, organizations either centralize processes or decentralize them substantially to exploit increasing returns to decentralization. Small reductions in coordination costs can trigger substantial decentralization and, paradoxically, undermine process reliability. Larger reductions in coordination costs also enhance reliability.