Technology, Information and the Decentralization of the Firm
Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
National Institute of Statistics and Economic Studies (INSEE) - Laboratory of Microeconometrics
John Van Reenen
London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)
University of Zurich; Centre for Economic Policy Research (CEPR)
April 13, 2006
MIT Department of Economics Working Paper No. 06-08
This paper develops a framework to analyze the relationship between the diffusion of new technologies and the decentralization decisions of firms. Centralized control relies on the information of the principal, which we equate with publicly available information. Decentralized control, on the other hand, delegates authority to a manager with superior information. However, the manager can use her informational advantage to make choices that are not in the best interest of the principal. As the available public information about the specific technology increases, the trade-off shifts in favor of centralization. We show that firms closer to the technological frontier, firms in more heterogeneous environments and younger firms are more likely to choose decentralization. Using three datasets of French and British firms in the 1990s, we report robust correlations consistent with these predictions.
Number of Pages in PDF File: 67
Keywords: decentralization, heterogeneity, learning, the theory of the firm
JEL Classification: O31, O32, O33, F23
Date posted: April 24, 2006
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