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When Does Coordination Require Centralization?

Author

Listed:
  • Matouschek, Niko
  • Dessein, Wouter
  • Alonso, Ricardo
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).

Suggested Citation

  • Matouschek, Niko & Dessein, Wouter & Alonso, Ricardo, 2006. "When Does Coordination Require Centralization?," CEPR Discussion Papers 5802, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5802
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    More about this item

    Keywords

    Coordination; Decision rights; Cheap talk; Incomplete contracts;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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