When Does Coordination Require Centralization?

Ricardo Alonso, Wouter Dessein and Niko Matouschek

American Economic Review, 2008, vol. 98, issue 1, pages 145-79

Abstract: This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multidivisional organization in which decisions must be adapted 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, decentralization can dominate centralization even when coordination is extremely important relative to adaptation. (JEL D23, D83, L23, M11)

Date: 2008
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