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Optimal hierarchies with diverse decision-makers

  • Puschke, Kerstin

We analyze the optimal decision-making hierarchy in an organization when decision-makers of limited liability have preferences conflicting with the organizations objective and exert externalities on their counterparts. In a horizontal hierarchy, every decision is made by a different agent. In a vertical hierarchy, one agent is in charge of all decisions. Only this agent is incentivized. This advantage is outweighed if there is a horizontal hierarchy so that the decision-makers preferences are close to the organizations objective with respect to the decision they are in charge of but far from the organizations objective for the other decisions.

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Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2007/10.

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Date of creation: 2007
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Handle: RePEc:zbw:fubsbe:200710
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  1. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  2. Schmitz, Patrick W, 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," CEPR Discussion Papers 5145, C.E.P.R. Discussion Papers.
  3. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
  5. Yingyi Qian & Gerard Roland & Chenggang Xu, 2006. "Coordination and Experimentation in M-Form and U-Form Organizations," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 366-402, April.
  6. Bester, Helmut, 2005. "Externalities, communication and the allocation of decision rights," Discussion Papers 2005/21, Free University Berlin, School of Business & Economics.
  7. Dessein, Wouter & Garicano, Luis & Gertner, Robert, 2007. "Organizing for Synergies," CEPR Discussion Papers 6019, C.E.P.R. Discussion Papers.
  8. Eyal Winter, 2004. "Incentives and Discrimination," American Economic Review, American Economic Association, vol. 94(3), pages 764-773, June.
  9. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, vol. 91(2), pages 200-205, May.
  10. Eric Maskin & Yingyi Qian & Chenggang Xu, 2000. "Incentives, Information, and Organizational Form," Review of Economic Studies, Oxford University Press, vol. 67(2), pages 359-378.
  11. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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