Managerial Quality in Centralized versus Decentralized Economic Systems

Abstract

In this paper, we ask, what are the dynamic consequences of a greater centralization or decentralization of decision-making authority (to appoint managers) on the quality of managers who are actually appointed? The central result we obtain is that there is a greater variability (over time) in the quality of managers in a more centralized system. An intuitive reason underlying this result is that though a highly capable decision maker has large beneficial effects on the managerial choices within a centralized system (because this decision maker wields greater authority in such a system), a highly incapable decision maker placed in the same position has correspondingly large deleterious effects. Our analysis also investigates the consequences of the above differences in managerial quality on the outputs of centralized versus decentralized systems.