The Hierarchical Organization of Management in the Firm: Economic Reasons and Efficient Structures

CERGE-EI Working Paper Series No. 81

29 Pages Posted: 1 Feb 2010

See all articles by Jacek Cukrowski

Jacek Cukrowski

CASE - Center for Social and Economic Research

Date Written: April 1, 1995

Abstract

Based on the analysis of organizational aspects of data processing in decision making, an economic explanation of the hierarchical organization of management in the firm is provided. Contrary to the prevailing opinion that "the explanation of hierarchy may in many cases be more sociological and psychological than purely economic in the mainstream sense" (Radner, 1992, p. 1384) the paper shows that decreasing returns to scale in information processing is a necessary condition for hierarchical organization of management in business firms. However, decentralization of decision-making is desirable only if an additional (sufficient) condition is satisfied, i.e., if the information workload of the decision-making sector is sufficiently large. Moreover, the paper shows that specific features of human information-processing in the firm such as disagreement about the goals of data analysis or the possibility of random errors do not imply a hierarchical organization of management, but could change forms of the efficient decision-making structures. Finally, contrary to the results recently presented in economic literature, the paper shows that in the firm, unlike in computer systems, there is no unique architecture for the efficient information-processing structures, but a number of various efficient forms can be observed.

Keywords: Information-processing, organization of the firm, decentralization, hierarchy

Suggested Citation

Cukrowski, Jacek, The Hierarchical Organization of Management in the Firm: Economic Reasons and Efficient Structures (April 1, 1995). CERGE-EI Working Paper Series No. 81. Available at SSRN: https://ssrn.com/abstract=1545805 or http://dx.doi.org/10.2139/ssrn.1545805

Jacek Cukrowski (Contact Author)

CASE - Center for Social and Economic Research ( email )

Center for Social and Economic Research,
Warsaw
Poland

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