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The decentralization of information processing in the presence of interactions

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  • Vayanos, Dimitri

Abstract

We propose a model of organizational decision making, in which information processing is decentralized. Our model incorporates two features of many actual organizations: aggregation entails a loss of useful information, and the decision problems of different agents interact. We assume that an organization forms a portfolio of risky assets, following a hierarchical procedure. Agents' decision rules and the organization's hierarchical structure are derived endogenously. Typically, in the optimal hierarchical structure, all agents have one subordinate, and returns to ability are at least as high at the bottom as at the top. However, these results can be reversed in the presence of returns to specialization.

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  • Vayanos, Dimitri, 2003. "The decentralization of information processing in the presence of interactions," LSE Research Online Documents on Economics 452, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:452
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    Cited by:

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    2. Aditya Goenka, 2004. "Non-Fungibility and Mental Accounting: A Model of Bounded Rationality with Sunspot," Econometric Society 2004 Australasian Meetings 234, Econometric Society.
    3. Luis Garicano & Luis Rayo, 2016. "Why Organizations Fail: Models and Cases," Journal of Economic Literature, American Economic Association, vol. 54(1), pages 137-192, March.
    4. Castanheira, Micael & Leppämäki, Mikko, 2003. "Optimal Information Management: Organizations versus Markets," CEPR Discussion Papers 4072, C.E.P.R. Discussion Papers.
    5. Andrea Patacconi, 2005. "Optimal Coordination in Hierarchies," Economics Series Working Papers 238, University of Oxford, Department of Economics.
    6. Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 779-805.
    7. Koijen, R.S.J., 2008. "Essays on asset pricing," Other publications TiSEM 75662994-29dc-4a83-a3ff-9, Tilburg University, School of Economics and Management.
    8. Andrea Patacconi, 2009. "Coordination and delay in hierarchies," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 190-208, March.
    9. Wouter Dessein & Tano Santos, 2003. "The Demand for Coordination," NBER Working Papers 10056, National Bureau of Economic Research, Inc.
    10. Wouter Dessein & Luis Garicano & Robert Gertner, 2010. "Organizing for Synergies," American Economic Journal: Microeconomics, American Economic Association, vol. 2(4), pages 77-114, November.
    11. Nejadmalayeri, Ali & Usman, Adam, 2022. "Real asset liquidity, cash holdings, and the cost of corporate debt," Global Finance Journal, Elsevier, vol. 53(C).
    12. Hens, Thorsten & Jean-Jacques Herings, P. & Predtetchinskii, Arkadi, 2006. "Limits to arbitrage when market participation is restricted," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 556-564, August.
    13. Andrea M. Buffa & Suleyman Basak, 2016. "A Theory of Operational Risk," 2016 Meeting Papers 352, Society for Economic Dynamics.

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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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