Abstract

This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multi-divisional organization in which decisions must be adapted to local conditions but also coordinated with each other. Information about local conditions is dispersed and held by self-interested division managers who communicate via cheap talk. The only available formal mechanism is the allocation of decision rights. We show that a higher need for coordination improves horizontal communication but worsens vertical communication. As a result, decentralization can dominate centralization even when coordination is extremely important relative to adaptation.

Authors
Ricardo Alonso, Wouter Dessein, and Niko Matouschek
Format
Journal Article
Publication Date
Journal
American Economic Review

Full Citation

Alonso, Ricardo, Wouter Dessein, and Niko Matouschek
. “When Does Coordination Require Centralization?”
American Economic Review
vol.
98
, (March 01, 2008):
145
-
179
.