On the Design of Hierarchies: Coordination Versus Specialization

55 Pages Posted: 16 Jul 2008

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

John Moore

University of Edinburgh - Economics; London School of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: October 1999

Abstract

We develop a model of hierarchies based on the allocation of authority. A firm's owners have ultimate authority over a firm's decisions, but they have limited time or capacity to exercise this authority. Hence owners must delegate authority to subordinates. However, these subordinates also have limited time or capacity and so further delegation must occur. We analyze the optimal chain of command given that different agents have different tasks: some agents are engaged in coordination and others in specialization. Our theory throws light on the nature of hierarchy, the optimal degree of decentralization, and the boundaries of the firm.

JEL Classification: D20, D80, H11, H70, L22, P11

Suggested Citation

Hart, Oliver D. and Moore, John Hardman, On the Design of Hierarchies: Coordination Versus Specialization (October 1999). LSE STICERD Research Paper No. TE375, Available at SSRN: https://ssrn.com/abstract=1160970

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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John Hardman Moore

University of Edinburgh - Economics ( email )

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