Hierarchy, Size, and Environmental Uncertainty

24 Pages Posted: 14 Jun 2001

See all articles by Kieron Meagher

Kieron Meagher

Australian National University (ANU) - School of Economics

Hakan Orbay

Sabanci University

Timothy Van Zandt

INSEAD - Economics and Political Sciences; Centre for Economic Policy Research (CEPR)

Date Written: June 2001

Abstract

We examine how a firm's changing environment and the information constraints of its managers interact as determinants of the size of the firm's administration. Following the recent decentralised information processing literature, we assume that it takes individual managers time to process information. A consequence is that it takes time for a firm to aggregate information, even when this task is shared. This delay increases with the amount of information that is aggregated, leading to the following trade-off: the more data the firm samples each period (and hence the larger its managerial staff), the more precisely it can estimate the state that its environment was in when the sample was taken but the more the environment has changed by the time these data are used to estimate the current state. We explore this trade-off for two computation models and for both a benchmark case of costless managers and the case of costly managers. When managers are costless, the size of the administrative staff increases monotonically, as the environment becomes more stable. In contrast, when managers are costly, optimal managerial size first increases and then decreases as a function of environmental stability.

Keywords: Decentralisation, hierachies, bounded rationality

JEL Classification: D23, D83

Suggested Citation

Meagher, Kieron and Orbay, Hakan and Van Zandt, Timothy, Hierarchy, Size, and Environmental Uncertainty (June 2001). CEPR Discussion Paper No. 2839. Available at SSRN: https://ssrn.com/abstract=273202

Kieron Meagher (Contact Author)

Australian National University (ANU) - School of Economics ( email )

Coombs Building 9
Canberra, Australian Capital Territory 0200
Australia

Hakan Orbay

Sabanci University ( email )

Istanbul, Orhanli, 34956 Tuzla
Turkey
+90 216 483 9664 (Phone)
+90 216 483 9699 (Fax)

Timothy Van Zandt

INSEAD - Economics and Political Sciences ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4981 (Phone)
+33 1 6074 6192 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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