When Does Coordination Require Centralization?

Niko Matouschek, Wouter Dessein () and Ricardo Alonso

No 5802, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D23 D83 L23 (search for similar items in EconPapers)
Date: 2006-08
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: When Does Coordination Require Centralization? (2008)
Working Paper: When does coordination require centralization? (2008)
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