When Does Coordination Require Centralization?

Ricardo Alonso, Wouter Dessein, Niko Matouschek

American Economic Review · 2008 · Volume 98 · Issue 1

Abstract

This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multidivisional 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. (JEL D23, D83, L23, M11)

Keywords

Organizational Behavior, Transaction Costs, Property Rights, Search, Learning, Information and Knowledge, Communication, Belief, Organization of Production, Production Management

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