Journal Article

The Decentralization of Information Processing in the Presence of Interactions

Dimitri Vayanos

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 70, issue 3, pages 667-695
Published in print July 2003 | ISSN: 0034-6527
Published online July 2003 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00261
The Decentralization of Information Processing in the Presence of Interactions

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  • Information, Knowledge, and Uncertainy
  • Production and Organizations

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We propose a model of organizational decision making, in which information processing is decentralized. Our model incorporates two features of many actual organizations: aggregation entails a loss of useful information, and the decision problems of different agents interact. We assume that an organization forms a portfolio of risky assets, following a hierarchical procedure. Agents' decision rules and the organization's hierarchical structure are derived endogenously. Typically, in the optimal hierarchical structure, all agents have one subordinate, and returns to ability are at least as high at the bottom as at the top. However, these results can be reversed in the presence of returns to specialization.

Keywords: D23; D83

Journal Article.  13067 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Production and Organizations

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