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On the Design of Hierarchies: Coordination versus Specialization

We consider an economy that has to decide how assets are to be used. Agents have ideas, but these ideas conflict. We suppose that decision-making authority is determined by hierarchy: each asset has a chain of command, and the most senior person with an idea exercises authority. We analyze the optimal hierarchical structure given that some agents coordinate and others specialize. Inter alia, our theory explains why coordinators should typically be senior to specialists, and why pyramidal hierarchies may be optimal. Our theory also throws light on the optimal degree of decentralization inside a firm and on firm boundaries.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 117.

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Length: 50
Date of creation: May 2005
Date of revision:
Handle: RePEc:edn:esedps:117
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  1. David C. King & Richard J. Zeckhauser, 1999. "Congressional Vote Options," NBER Working Papers 7342, National Bureau of Economic Research, Inc.
  2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  3. Alfred D. Chandler, 1969. "Strategy and Structure: Chapters in the History of the American Industrial Enterprise," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262530090, June.
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  5. Oliver Hart & John Moore, 1999. "On the Design of Hierarchies: Coordination Versus Specialization," NBER Working Papers 7388, National Bureau of Economic Research, Inc.
  6. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  7. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, July.
  9. Argyres, Nicholas S., 1995. "Technology strategy, governance structure and interdivisional coordination," Journal of Economic Behavior & Organization, Elsevier, vol. 28(3), pages 337-358, December.
  10. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
  11. Michael Keren & David Levhari, 1979. "The Optimum Span of Control in a Pure Hierarchy," Management Science, INFORMS, vol. 25(11), pages 1162-1172, November.
  12. Michael D. Hurd & James P. Smith, 2001. "Anticipated and Actual Bequests," NBER Chapters, in: Themes in the Economics of Aging, pages 357-392 National Bureau of Economic Research, Inc.
  13. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  14. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  15. Robert E. Lipsey, 1999. "Foreign Production by U.S. Firms and Parent Firm Employment," NBER Working Papers 7357, National Bureau of Economic Research, Inc.
  16. repec:bla:restud:v:66:y:1999:i:3:p:633-58 is not listed on IDEAS
  17. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
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