On the Design of Hierarchies: Coordination versus Specialization

Abstract

We consider an economy that has to decide how assets are to be used. Agents have ideas, but these ideas conflict. We suppose that decision‐making authority is determined by hierarchy: each asset has a chain of command, and the most senior person with an idea exercises authority. We analyze the optimal hierarchical structure given that some agents coordinate and other specialize. Among other things, our theory explains why coordinators should typically be senior to specialists and why pyramidal hierarchies may be optimal. Our theory also throws light on the optimal degree of decentralization inside a firm and on firm boundaries.

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