When Does Centralization Undermine Adaptation?

59 Pages Posted: 25 Nov 2018 Last revised: 13 Apr 2022

See all articles by Shuo Liu

Shuo Liu

Peking University - Guanghua School of Management

Dimitri Migrow

University of Calgary

Date Written: February 28, 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, an organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if (a) communication takes the form of verifiable dis- closure and (b) there is no uncertainty about which division’s success will be more critical to the organization’s overall performance, then centralization always dominates decentralization in generating information, and therefore may even lead to more adaptative decisions. However, when the above uncertainty in the headquarters’ decision criterion is present, 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, a decentralized authority structure 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? (February 28, 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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