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Hierarchy Size and Environmental Uncertainty

  • Meagher, Kieron J
  • Orbay, Hakan
  • Van Zandt, Timothy

We examine how a firm's changing environment and the information constraints of its managers interact as determinants of the size of the firm's administration. Following the recent decentralised information processing literature, we assume that it takes individual managers time to process information. A consequence is that it takes time for a firm to aggregate information, even when this task is shared. This delay increases with the amount of information that is aggregated, leading to the following trade-off: the more data the firm samples each period (and hence the larger its managerial staff), the more precisely it can estimate the state that its environment was in when the sample was taken but the more the environment has changed by the time these data are used to estimate the current state. We explore this trade-off for two computation models and for both a benchmark case of costless managers and the case of costly managers. When managers are costless, the size of the administrative staff increases monotonically, as the environment becomes more stable. In contrast, when managers are costly, optimal managerial size first increases and then decreases as a function of environmental stability.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2839.

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Date of creation: Jun 2001
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Handle: RePEc:cpr:ceprdp:2839
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  1. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
  2. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  3. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  4. Timothy Van Zandt & Roy Radner, 1998. "Real-Time Decentralized Information Processing and Returns to Scale," Discussion Papers 1233, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Van Zandt, Timothy, 1999. "Real-Time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 633-58, July.
  6. Timothy Van Zandt, 1998. "The scheduling and organization of periodic associative computation: Efficient networks," Review of Economic Design, Springer, vol. 3(2), pages 93-127.
  7. Orbay, Hakan, 2002. "Information Processing Hierarchies," Journal of Economic Theory, Elsevier, vol. 105(2), pages 370-407, August.
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