On the Design of Hierarchies: Coordination Versus Specialization

57 Pages Posted: 21 Oct 1999 Last revised: 14 Oct 2010

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.

Suggested Citation

Hart, Oliver D. and Moore, John Hardman, On the Design of Hierarchies: Coordination Versus Specialization (October 1999). NBER Working Paper No. w7388, Available at SSRN: https://ssrn.com/abstract=185374

Oliver D. Hart (Contact Author)

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