ON THE (SUB) OPTIMALITY OF MULTI-TIER HIERARCHIES: COORDINATION VERSUS MOTIVATION

Chongwoo Choe and Shingo Ishiguro

No 18/08, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper studies internal organization of a firm using an incomplete contracting approach `a la Grossman-Hart-Moore and Aghion-Tirole. The two key ingredients of our model are externalities among tasks that require coordination, and investment in task-specific human capital. We compare three types of organizational structures: centralization where the decision authority for all tasks is given to the party without task-specific human capital, decentralization where the decision authority for each task is given to the party with necessary human capital, and hierarchical delegation where the decision authority is allocated in a hierarchical fashion. Centralization is optimal when externalities and the requisite coordination are the main issue in organization design. Decentralization is optimal if the investment in human capital is more important. Hierarchical delegation is optimal in the intermediate case. We also discuss the optimal pattern of hierarchical delegation as well as several directions extending the basic model.

Keywords: Delegation; Incomplete Contracts; Hierarchy (search for similar items in EconPapers)
JEL-codes: C70 D23 L22 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2009-07-01
New Economics Papers: this item is included in nep-bec and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: On the (Sub)optimality of Multi-tier Hierarchies: Coordination versus Motivation (2008)
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