Structure and Returns to Scale of Real-Time Hierarchical Resource Allocation

21 Pages Posted: 5 Apr 2004

See all articles by Timothy Van Zandt

Timothy Van Zandt

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

Date Written: March 2004

Abstract

Companion papers develop a model of real-time hierarchical computation of resource allocations by boundedly rational members of an administrative staff. The nodes of a hierarchy are multi-person decision-making units offices. The current Paper uses a reduced form to address specific questions about organizational structure and returns to scale. We find that the possibility of decentralizing decision-making within these hierarchical organizations allows for larger hierarchies. Organization size is, however, still bounded because the combined effect of cumulative delay and administrative costs means that in large enough hierarchies, the value of the root office's information processing is less than the office's administrative costs. We also find that as the environment changes more rapidly, optimal hierarchies become smaller and more internally decentralized. A speed-up of managerial processing, such as through improved information technology, has the opposite effect.

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

JEL Classification: D23, D83

Suggested Citation

Van Zandt, Timothy, Structure and Returns to Scale of Real-Time Hierarchical Resource Allocation (March 2004). CEPR Discussion Paper No. 4277. Available at SSRN: https://ssrn.com/abstract=527102

Timothy Van Zandt (Contact Author)

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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