When does centralization undermine adaptation?

Shuo Liu and Dimitri Migrow

Journal of Economic Theory, 2022, vol. 205, issue C

Abstract: We revisit the classic problem of optimally allocating decision rights in a multi-divisional organization. To be able to adapt its decisions to local conditions, the organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if division managers are certain about how the headquarter (HQ) weights each division's performance, centralization may always dominate decentralization in generating information, and therefore even lead to more adaptative decisions. However, with uncertainty in HQ's decision criterion, centralization can perform poorly in motivating information acquisition, and particularly so when it is highly important to coordinate the activities of different divisions. As a result, decentralization can be optimal even with an arbitrarily strong coordination motive.

Keywords: Centralization; Decentralization; Coordinated adaptation; Information acquisition; Verifiable disclosure (search for similar items in EconPapers)
JEL-codes: D82 M52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:205:y:2022:i:c:s0022053122001235

DOI: 10.1016/j.jet.2022.105533

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