Optimal hierarchies with diverse decision-makers

Kerstin Puschke

No 2007/10, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: We analyze the optimal decision-making hierarchy in an organization when decision-makers of limited liability have preferences conflicting with the organization's objective and exert externalities on their counterparts. In a horizontal hierarchy, every decision is made by a different agent. In a vertical hierarchy, one agent is in charge of all decisions. Only this agent is incentivized. This advantage is outweighed if there is a horizontal hierarchy so that the decision-makers' preferences are close to the organization's objective with respect to the decision they are in charge of but far from the organization's objective for the other decisions.

Keywords: Authority; Decision Rights; Incomplete Contracts (search for similar items in EconPapers)
JEL-codes: D23 D86 L23 (search for similar items in EconPapers)
Date: 2007
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Working Paper: Optimal Hierarchies with Diverse Decision-Makers
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