Governing Adaptation¹

Abstract

To remain competitive, an organization must both respond to information about its environment and coordinate its activities. We analyse how the allocation of decision rights within an organizational hierarchy influences the organization's ability to solve such problems of coordinated adaptation when 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 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.1. This paper is based on chapter 1 of my PhD dissertation submitted to the Massachusetts Institute of Technology. RANTAKARI GOVERNING ADAPTATION 1259the common intuition of coordination requiring centralized decision-making holds broadly true. When the need for coordination is sufficiently low, decentralized authority is preferred to limit the loss of information due to strategic communication and so maintain the adaptiveness of the divisions. When the need for coordination is sufficiently high, centralized authority is preferred to improve coordination between the divisions. It is worth noting, however, that the actual performance differential between centralized and decentralized authority is S-shaped, with the two solutions converging when coordination becomes both very important and unnecessary. Intuitively, when coordination is the overriding concern for divisional performance, the division managers are willing to coordinate their actions even under decentralization. Alternatively, when the divisions are fully independent, no incentive conflicts are present and perfect adaptation can also be achieved under centralization. It is only when the organization needs to balance conflicting needs for adaptation that the issue of conflicting preferences arises, and the ability of the different governance structures to manage those conflicts plays a meaningful role. When the divisions are sufficiently asymmetric in their need for adaptation and coordination, then one of the asymmetric governance structures is the preferred choice. We can distinguish between various different asymmetries. First, when one division is either larger or faces a more volatile environment, then authority is delegated only to that division (partial decentralization or directional authority). Intuitively, both variables increase the relative importance of making right decisions for that division, which is achieved by delegating authority to limit informational losses due to strategic communication. Second, when one division cares more abou...

Coordination in heterogeneous federal systems

“…Finally, in organization theory, Alonso et al (2008) and Rantakari (2008) analyze strategic communication in a coordination game similar to ours and show that a greater need for coordination improves the quality of communication under decentralization.…”

Information, Authority, and Corporate Hierarchies

“…A number of recent studies have been concerned with the allocation of authority within an organization in tackling coordination problems (Athey and Roberts, 2001;Friebel and Raith, 2006;Dessein, Garicano and Gertner, 2007;Alonso, Dessein and Matouschek, 2008;Rantakari, 2008). For example, Alonso, Dessein and Matouschek (2008) and Rantakari (2008) show that coordination can be achieved through cheap talk communication between division managers when they are given the decision authority, the benefits of which increase with decentralization.…”

“…For example, Alonso, Dessein and Matouschek (2008) and Rantakari (2008) show that coordination can be achieved through cheap talk communication between division managers when they are given the decision authority, the benefits of which increase with decentralization. However, these studies are not directly concerned with multi-tier hierarchies.…”

Communication and Influence

“…Our approach to multiperson decision-making under asymmetric information, as well as our normal-quadratic formulation, is inspired by Marschak and Radner's (1972) team theory. Some recent papers (Dessein and Santos 2006, Alonso et al 2008, Rantakari 2008, Dessein et al 2013) explore decentralized decision-making within organizations. Besides sharing their normal-quadratic setup, we are also interested in the trade-off between adaptation and coordination.…”