When Does Adaptation Require Decentralization?
49 Pages Posted: 3 May 2012
Date Written: March 2012
We examine the relationship between the organization of a firm and its ability to adapt to changes in the environment. We show that even if lower-level managers have superior information about their local conditions, and incentive conflicts are negligible, a centralized organization can be better at adapting to changes in the environment than a decentralized one. We then show that this result reverses some of the standard intuitions about organizational structure. For instance, an increase in competition that makes adaptation more important can favor centralization over decentralization.
Keywords: adaptation, information, organization
JEL Classification: D23, D83, L23
Suggested Citation: Suggested Citation