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Organization Design

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  • MILTON HARRIS
  • ARTUR RAVIV

Abstract

This paper attempts to explain organization structure based on optimal coordination of interactions among activities. The main idea is that each manager is capable of detecting and coordinating interactions only within his limited area of expertise. Only the CEO can coordinate company wide interactions. The optimal design of the organization trades off the costs and benefits of various configurations of managers. Our results consist of classifying the characteristics of activities and managerial costs that lead to the matrix organization, the functional hierarchy, the divisional hierarchy, or a fiat hierarchy. We also investigate the effect of changing the costs of various managers on the nature of the optimal organization, including the extent of centralization.
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Suggested Citation

  • Milton Harris & Artur Raviv, 1999. "Organization Design," CRSP working papers 499, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  • Handle: RePEc:wop:chispw:499
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    File URL: http://gsbwww.uchicago.edu/fac/finance/papers/orgdsign.pdf
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    References listed on IDEAS

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    Cited by:

    1. Suraj Prasad, 2009. "Task assignments and incentives: generalists versus specialists," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 380-403.
    2. Fabio Landini & Antonio Nicolò & Marco Piovesan, 2013. "The Hidden Cost of Specialization," IFRO Working Paper 2013/9, University of Copenhagen, Department of Food and Resource Economics.
    3. repec:eee:proeco:v:188:y:2017:i:c:p:41-49 is not listed on IDEAS
    4. Carlin, Bruce Ian & Chowdhry, Bhagwan & Garmaise, Mark J., 2012. "Investment in organization capital," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 268-286.
    5. Carroll, Timothy N. & Hunter, Starling D., 2006. "Organizational Design, Organizational Learning, And The Market Value Of The Firm," Working papers 30608, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Andrea Patacconi, 2005. "Optimal Coordination in Hierarchies," Economics Series Working Papers 238, University of Oxford, Department of Economics.
    7. M. Idriss GHODBANE, 2002. "Centralization Versus Decentralization in Credit Lending," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2002002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    8. Grimpe, Christoph & Murmann, Martin & Sofka, Wolfgang, 2017. "The organizational design of high-tech startups and product innovation," ZEW Discussion Papers 17-074, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. Jeremy C. Stein, 2000. "Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms," NBER Working Papers 7705, 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. Inderst, Roman & Muller, Holger M. & Warneryd, Karl, 2007. "Distributional conflict in organizations," European Economic Review, Elsevier, vol. 51(2), pages 385-402, February.
    12. Boot, Arnoud W. A. & Schmeits, Anjolein, 2000. "Market Discipline and Incentive Problems in Conglomerate Firms with Applications to Banking," Journal of Financial Intermediation, Elsevier, vol. 9(3), pages 240-273, July.
    13. Grimpe, Christoph & Murmann, Martin & Sofka, Wolfgang, "undated". "The organizational design of high-tech startups and product innovation," IAB Discussion Paper 201801, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    14. Leszek Chodorowski, 2011. "Central Banks-as the Key Public Institutions Aiming at the Improvement of Effectiveness and Efficiency of their Performance, part 2," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 27.
    15. Costa, Cristiano M. & Ferreira, Daniel & Moreira, Humberto, 2005. "Biased managers, organizational design, and incentive provision," Economics Letters, Elsevier, vol. 86(3), pages 379-385, March.
    16. Martin G. Kocher & Ganna Pogrebna & Matthias Sutter, "undated". "The Determinants of Managerial Decisions Under Risk," Working Papers 2008-04, Faculty of Economics and Statistics, University of Innsbruck.
    17. Chi, Tailan & Nystrom, Paul C. & Kircher, Philipp, 2004. "Knowledge-based resources as determinants of MNC structure: tests of an integrative model," Journal of International Management, Elsevier, vol. 10(2), pages 219-238.
    18. Tsuyoshi Toshimitsu, 2017. "The optimal choice of internal decision-making structures in a network industry," Discussion Paper Series 166, School of Economics, Kwansei Gakuin University, revised Sep 2017.

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