Structure and Returns to Scale of Real-Time Hierarchical Resource Allocation
Companion papers develop a model of real-time hierarchical computation of resource allocations by boundedly rational members of an administrative staff. The nodes of a hierarchy are multi-person decision-making units offices. The current Paper uses a reduced form to address specific questions about organizational structure and returns to scale. We find that the possibility of decentralizing decision-making within these hierarchical organizations allows for larger hierarchies. Organization size is, however, still bounded because the combined effect of cumulative delay and administrative costs means that in large enough hierarchies, the value of the root office ’s information processing is less than the office ’s administrative costs. We also find that as the environment changes more rapidly, optimal hierarchies become smaller and more internally decentralized. A speed-up of managerial processing, such as through improved information technology, has the opposite effect.
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- 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.
- Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-1146, September.
- Timothy Van Zandt, 1997. "Real-Time Hierarchical Resource Allocation," Discussion Papers 1231, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Van Zandt, Timothy, 2004. "Balancedness of Real-Time Hierarchical Resource Allocation," CEPR Discussion Papers 4276, C.E.P.R. Discussion Papers.
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