Working Paper: CEPR ID: DP4277
Authors: Timothy Van Zandt
Abstract: Companion papers develop a model of real-time hierarchical computation of resource allocations by boundedly rational members of an administrative staff. The nodes of a hierarchy are multi-person decision-making units offices. The current Paper uses a reduced form to address specific questions about organizational structure and returns to scale. We find that the possibility of decentralizing decision-making within these hierarchical organizations allows for larger hierarchies. Organization size is, however, still bounded because the combined effect of cumulative delay and administrative costs means that in large enough hierarchies, the value of the root office ?s information processing is less than the office ?s administrative costs. We also find that as the environment changes more rapidly, optimal hierarchies become smaller and more internally decentralized. A speed-up of managerial processing, such as through improved information technology, has the opposite effect.
Keywords: bounded rationality; decentralization; hierarchies; realtime computation; resource allocation
JEL Codes: D23; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decentralization of decision-making (H77) | Organizational size (L25) |
| Speed of environmental changes (O44) | Organizational size (L25) |
| Improvements in information technology (L86) | Organizational structure (L22) |
| Environmental speed (Q56) | Decentralization of decision-making (H77) |