Centralization versus Decentralization as a Risk-Return Trade-Off

Journal of Law and Economics, Vol. 53, 2010

Amsterdam Center for Law & Economics Working Paper No. 2007-06

29 Pages Posted: 12 Sep 2007 Last revised: 30 Mar 2011

See all articles by Alessandra Arcuri

Alessandra Arcuri

Erasmus School of Law; Erasmus Initiative of Inclusive Prosperity

Giuseppe Dari‐Mattiacci

Columbia University - Law School

Date Written: February 11, 2009

Abstract

This paper characterizes the choice between centralization and decentralization as a risk-return trade-off and examines it in a model that integrates ideas from committee-decisionmaking and portfolio theories. Centralization, by pooling expertise, rarely yields erroneous decisions; however, when it fails, the consequences are global. In contrast, in a decentralized system, erroneous decisions are more frequent but their consequences are locally confined. We assess the relative desirability of (de-)centralization in various scenarios with independent versus interdependent risks. We further discuss the robustness of the model and the relevance of our results for policymaking.

Keywords: centralization, decentralization, federalism, Condorcet Jury Theorem, risk diversification

JEL Classification: D72, K00, K33

Suggested Citation

Arcuri, Alessandra and Dari-Mattiacci, Giuseppe, Centralization versus Decentralization as a Risk-Return Trade-Off (February 11, 2009). Journal of Law and Economics, Vol. 53, 2010; Amsterdam Center for Law & Economics Working Paper No. 2007-06. Available at SSRN: https://ssrn.com/abstract=1013329

Alessandra Arcuri (Contact Author)

Erasmus School of Law; Erasmus Initiative of Inclusive Prosperity ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam
Netherlands

HOME PAGE: http://alessandraarcuri.com

Giuseppe Dari-Mattiacci

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.law.columbia.edu/faculty/giuseppe-dari-mattiacci

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