Governing Adaptation

Review of Economic Studies, Vol. 75, No. 4, pp. 1257-1285, October 2008

Posted: 6 Jul 2007 Last revised: 30 Oct 2008

See all articles by Heikki Rantakari

Heikki Rantakari

University of Rochester - Simon Business School

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

Rantakari, Heikki, Governing Adaptation (January 22, 2008). Review of Economic Studies, Vol. 75, No. 4, pp. 1257-1285, October 2008, Available at SSRN: https://ssrn.com/abstract=998338

Heikki Rantakari (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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