Coordination and Organization Design: Theory and Micro-evidence

We explore the relationship between the volatility of a firm's local environment and its organizational structure. Using micro-level data on managers working for a large retailer, we empirically test and provide support for our theory that a more volatile local environment results in more decentralization only when the need for coordination among sub-units is low. In contrast, more local volatility is associated with more centralization when coordination needs are high. Our evidence supports the argument that centralized organizations are better at adapting to local shocks when coordination is important.