Aggregate Information and Organizational Structures
Dongsoo Shin, Gorkem Celik, and Roland Strausz
Abstract:
We study an organization with a top management (principal) and multiple subunits (agents) with private information that determine the organization's aggregate efficiency. Under centralization, eliciting the agent's private information may induce the principal to manipulate aggregate information, which obstructs an e¤ective use of information for the organization. Under delegation, the principal concedes more information rent, but is able to use the agent's information more effectively. The trade-off between the organizational structures depends on the likelihood that the agents are efficient. Centralization is optimal when such likelihood is low. Delegation, by contrast, is optimal when it is high.