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On the Design of Hierarchies: Coordination versus Specialization

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Abstract

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.

Suggested Citation

  • Oliver Hart & John Moore, 2005. "On the Design of Hierarchies: Coordination versus Specialization," Edinburgh School of Economics Discussion Paper Series 117, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:117
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    File URL: http://www.econ.ed.ac.uk/papers/id117_esedps.pdf
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    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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