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Optimal Coordination in Hierarchies

  • Andrea Patacconi
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    This paper studies the optimal allocation of coordination responsibilities in organizations where duplication of effort is a serious concern. The planner`s objective is to minimize a weighted average of the wage bill and the cost of delay. The paper provides conditions under which, in balanced hierarches, communication effort is increasing and the span of control is decreasing as one travels up the hierarchy, with equalities holding if wages are negligible relative to the weight attached to the cost of delay. The analysis suggests that concerns for fast decision-making may be key in explaining the recent trend towards empowerment in firms. Several variants of the basic model are studied, including one focusing on communicative skills and another in which, as urgency increases, the optimal span of control increases and the hierarchy flattens. Evidence supporting these results is discussed.

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    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 238.

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    Date of creation: 01 Jun 2005
    Date of revision:
    Handle: RePEc:oxf:wpaper:238
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    1. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-80, January.
    2. Alan Beggs, 2000. "Queues and Hierarchies," Economics Series Working Papers 34, University of Oxford, Department of Economics.
    3. Van Zandt, Timothy, 2004. "Balancedness of Real-Time Hierarchical Resource Allocation," CEPR Discussion Papers 4276, C.E.P.R. Discussion Papers.
    4. Dimitri Vayanos, 2003. "The Decentralization of Information Processing in the Presence of Interactions," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 667-695, 07.
    5. Marin, Dalia & Verdier, Thierry, 2002. "Globalization and the 'New Enterprise'," Discussion Papers in Economics 11, University of Munich, Department of Economics.
    6. Dessein, Wouter & Santos, Jesus, 2003. "The Demand for Coordination," CEPR Discussion Papers 4096, C.E.P.R. Discussion Papers.
    7. Gary S. Murphy Becker & Kevin M., 1992. "The Division of Labor, Coordination Costs, and Knowledge," University of Chicago - George G. Stigler Center for Study of Economy and State 79, Chicago - Center for Study of Economy and State.
    8. repec:tpr:qjecon:v:109:y:1994:i:4:p:809-39 is not listed on IDEAS
    9. Oliver Hart & John Moore, 1999. "On the Design of Hierarchies: Coordination Versus Specialization," NBER Working Papers 7388, National Bureau of Economic Research, Inc.
    10. repec:tpr:qjecon:v:117:y:2002:i:1:p:187-223 is not listed on IDEAS
    11. Mathias Dewatripont & Patrick Bolton, 1996. "The firm as a communication network," ULB Institutional Repository 2013/9597, ULB -- Universite Libre de Bruxelles.
    12. Gifford, Sharon, 1992. "Allocation of entrepreneurial attention," Journal of Economic Behavior & Organization, Elsevier, vol. 19(3), pages 265-284, December.
    13. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
    14. Keren, Michael & Levhari, David, 1989. "Decentralization, aggregation, control loss and costs in a hierarchical model of the firm," Journal of Economic Behavior & Organization, Elsevier, vol. 11(2), pages 213-236, March.
    15. Prat, Andrea, 1997. "Hierarchies of Processors with Endogenous Capacity," Journal of Economic Theory, Elsevier, vol. 77(1), pages 214-222, November.
    16. Meagher, Kieron J., 2003. "Generalizing incentives and loss of control in an optimal hierarchy: the role of information technology," Economics Letters, Elsevier, vol. 78(2), pages 273-280, February.
    17. VANÂ ZANDT, Timothy, 1995. "Continuous Approximations in the Study of Hierarchies," CORE Discussion Papers 1995002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    18. Raghuram G. Rajan & Julie Wulf, 2006. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 759-773, November.
    19. Philippe Jehiel, 1999. "Information Aggregation and Communication in Organizations," Management Science, INFORMS, vol. 45(5), pages 659-669, May.
    20. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
    21. Athey, Susan, 2002. "Monotone Comparative Statics Under Uncertainty," Scholarly Articles 3372263, Harvard University Department of Economics.
    22. Michael Keren & David Levhari, 1979. "The Optimum Span of Control in a Pure Hierarchy," Management Science, INFORMS, vol. 25(11), pages 1162-1172, November.
    23. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
    24. Milton Harris & Artur Raviv, 2002. "Organization Design," Management Science, INFORMS, vol. 48(7), pages 852-865, July.
    25. Julio J. Rotemberg, 1999. "Process- Versus Function-Based Hierarchies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 453-487, December.
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