On the Optimality of Multi-Tier Hierarchies: Coordination Versus Motivation

Journal of Law, Economics and Organization, Forthcoming

41 Pages Posted: 17 Jan 2012

See all articles by Chongwoo Choe

Chongwoo Choe

Monash University - Department of Economics

Shingo Ishiguro

Nanzan University - School of Business Administration

Date Written: June 10, 2010

Abstract

We study internal organization of a rm that comprises a CEO and two division managers. The two key ingredients of our model are externalities among divisions' projects that may require coordination, and effort incentives for the CEO and the two division managers. Depending on how the decision authority over each project is allocated, we compare various organizational structures including centralization, different forms of partial and full delegation, and hierarchical delegation. We identify conditions under which different organizational structures can be Pareto-ranked. We also discuss the optimal pattern of hierarchical delegation, and o er various examples of organizational restructuring in large corporations that our theory can shed light on.

Keywords: Centralization, Decentralization, Hierarchy

JEL Classification: C70, D23, L22

Suggested Citation

Choe, Chongwoo and Ishiguro, Shingo, On the Optimality of Multi-Tier Hierarchies: Coordination Versus Motivation (June 10, 2010). Journal of Law, Economics and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1986389

Chongwoo Choe (Contact Author)

Monash University - Department of Economics ( email )

Department of Economics
PO Box 197
Caulfield East, Victoria 3145
Australia
+61 2 9903 1125 (Phone)
+61 2 9903 1128 (Fax)

Shingo Ishiguro

Nanzan University - School of Business Administration ( email )

18 Yamazato-cho
Showa-ku
Nagoya 466
Japan

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