When Does Centralization Undermine Adaptation?

58 Pages Posted: 25 Nov 2018 Last revised: 14 Jul 2022

See all articles by Shuo Liu

Shuo Liu

Peking University - Guanghua School of Management

Dimitri Migrow

University of Calgary

Date Written: July 14, 2022

Abstract

We revisit the classic problem of optimally allocating decision rights in a multi-divisional organization. To be able to adapt its decisions to local conditions, the organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if division managers are certain about how the headquarter (HQ) weights each division's performance, centralization may always dominate decentralization in generating information, and therefore even lead to more adaptative decisions. However, with uncertainty in HQ’s decision criterion, centralization can perform poorly in motivating information acquisition, and particularly so when it is highly important to coordinate the activities of different divisions. As a result, decentralization can be optimal even with an arbitrarily strong coordination motive.

Keywords: centralization, decentralization, coordinated adaptation, information acquisition, verifiable disclosure

JEL Classification: D82, M52

Suggested Citation

Liu, Shuo and Migrow, Dimitri, When Does Centralization Undermine Adaptation? (July 14, 2022). Available at SSRN: https://ssrn.com/abstract=3275742 or http://dx.doi.org/10.2139/ssrn.3275742

Shuo Liu (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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