Organization Design

35 Pages Posted: 9 Sep 1999

Multiple version iconThere are 2 versions of this paper

Date Written: February 2000


This paper attempts to explain organization structure based on optimal coordination of interactions among activities. The main idea is that each manager is capable of detecting and coordinating interactions only within his limited area of expertise. Only the CEO can coordinate company-wide interactions. The optimal design of the organization trades off the costs and benefits of various configurations of managers. Our results consist of classifying the characteristics of activities and managerial costs that lead to the matrix organization, the functional hierarchy, the divisional hierarchy, or a flat hierarchy. We also investigate the effect of changing the fixed and variable costs of managers on the nature of the optimal organization, including the extent of centralization.

JEL Classification: D2, G3, L2

Suggested Citation

Harris, Milton and Raviv, Artur, Organization Design (February 2000). CRSP Working Paper No. 499; EFA 0271. Available at SSRN: or

Milton Harris (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
(773) 702-2549 (Phone)
(773) 753-8310 (Fax)


Artur Raviv

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8342 (Phone)
847-491-5719 (Fax)

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