When Does Coordination Require Centralization?

57 Pages Posted: 10 Oct 2006

See all articles by Ricardo Alonso

Ricardo Alonso

London School of Economics & Political Science (LSE) - Department of Management

Wouter Dessein

University of Chicago - Booth School of Business

Niko Matouschek

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: August 2006

Abstract

This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multi-divisional organization in which decisions must be responsive to local conditions but also coordinated with each other. Information about local conditions is dispersed and held by self-interested division managers who communicate via cheap talk. The only available formal mechanism is the allocation of decision rights. We show that a higher need for coordination improves horizontal communication but worsens vertical communication. As a result, no matter how important coordination is, decentralization dominates centralization if the division managers are not too biased towards their own divisions and the divisions are not too different from each other (e.g. in terms of division size).

Keywords: Coordination, decision rights, cheap talk, incomplete contracts

JEL Classification: D23, D83, L23

Suggested Citation

Alonso, Ricardo and Dessein, Wouter and Matouschek, Niko, When Does Coordination Require Centralization? (August 2006). CEPR Discussion Paper No. 5802, Available at SSRN: https://ssrn.com/abstract=936430

Ricardo Alonso

London School of Economics & Political Science (LSE) - Department of Management ( email )

United Kingdom

HOME PAGE: http://www.lse.ac.uk/management/people/ralonso.aspx

Wouter Dessein

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Niko Matouschek (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-4166 (Phone)
847-467-1777 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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