On the Design of Hierarchies: Coordination Versus Specialization

Posted: 9 Aug 2005

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

John Moore

University of Edinburgh - Economics; London School of Economics

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Abstract

We consider an economy that has to decide how assets are to be used. Agents have ideas, but these ideas conflict. We suppose that decision-making authority is determined by hierarchy: each asset has a chain of command, and the most senior person with an idea exercises authority. We analyze the optimal hierarchical structure given that some agents coordinate and other specialize. Among other things, our theory explains why coordinators should typically be senior to specialists and why pyramidal hierarchies may be optimal. Our theory also throws light on the optimal degree of decentralization inside a firm and on firm boundaries.

Suggested Citation

Hart, Oliver D. and Moore, John Hardman, On the Design of Hierarchies: Coordination Versus Specialization. Journal of Political Economy, Vol. 113, pp. 675-702, August 2005, Available at SSRN: https://ssrn.com/abstract=772073

Oliver D. Hart

Harvard University - Department of Economics ( email )

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