Governing Adaptation
Review of Economic Studies, Vol. 75, No. 4, pp. 1257-1285, October 2008
Posted: 6 Jul 2007 Last revised: 30 Oct 2008
Date Written: January 22, 2008
Abstract
To remain competitive, an organization needs to respond to information about its environment while at the same time retaining coordination among its activities. We analyze how the allocation of decision rights within an organizational hierarchy influences the organization's ability to solve such problems of coordinated adaptation information is both soft and distributed inside the organization and the organizational participants behave strategically. The results show that, contrary to the common intuition, the performance differential between centralized and decentralized decision-making is non-monotone in the importance of coordination. Further, both of these common structures are dominated by asymmetric structures in sufficiently asymmetric environments (such as a small division developing a new product in the presence of a large division with an established product). Finally, if the incentive conflicts between the participants can be made sufficiently small, centralized decision-making is always dominated by decentralized decision-making.
Keywords: cheap talk, communication, coordination, decision-making
JEL Classification: D23, D82, L23
Suggested Citation: Suggested Citation