Real-Time Hierarchical Resource Allocation with Quadratic Costs

39 Pages Posted: 8 Oct 2003

See all articles by Timothy Van Zandt

Timothy Van Zandt

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

Date Written: August 2003


This Paper presents a model in which boundedly rational members of an administrative staff calculate resource allocations in real time. We consider a class of hierarchical procedures in which information about payoff functions flows up and is aggregated by a hierarchy, while allocations flow down and are disaggregated by the hierarchy with decentralized decision making. We assume that the payoff functions are quadratic and that the payoff parameters follow first-order autoregressive processes. We define a team statistical optimality condition that formalizes the notion of decentralized decision making. We derive a reduced form that can be used to address specific questions about organizational structure and returns to scale.

Keywords: Decentralization, hierarchies, bounded rationality, resource allocation, real-time computation

JEL Classification: D23, D83

Suggested Citation

Van Zandt, Timothy, Real-Time Hierarchical Resource Allocation with Quadratic Costs (August 2003). Available at SSRN:

Timothy Van Zandt (Contact Author)

INSEAD - Economics and Political Sciences ( email )

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Centre for Economic Policy Research (CEPR)

United Kingdom

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