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On the Optimality of Multi-tier Hierarchies: Coordination versus Motivation

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  • Chongwoo Choe
  • Shingo Ishiguro

Abstract

We study internal organization of a firm that comprises a CEO and two division managers. The two key ingredients of our model are externalities among divisions' projects that may require coordination and effort incentives for the CEO and the two division managers. Depending on how decision authority over each project is allocated, we compare various organizational structures including centralization, different forms of partial and full delegation, and hierarchical delegation. We identify conditions under which different organizational structures can be Pareto ranked. We also discuss the optimal pattern of hierarchical delegation and offer various examples of organizational restructuring in large corporations that our theory can shed light on. The Author 2011. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Chongwoo Choe & Shingo Ishiguro, 2012. "On the Optimality of Multi-tier Hierarchies: Coordination versus Motivation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(3), pages 486-517, August.
    • Handle: RePEc:oup:jleorg:v:28:y:2012:i:3:p:486-517
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    File URL: http://hdl.handle.net/10.1093/jleo/ewr022
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    Cited by:

    1. Beckmann, Michael & Cornelissen, Thomas & Kräkel, Matthias, 2017. "Self-managed working time and employee effort: Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 285-302.
    2. Matthias Kräkel, 2017. "Authority and Incentives in Organizations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(2), pages 295-311, April.
    3. Junichiro Ishida, 2015. "Hierarchies Versus Committees: Communication and Information Acquisition in Organizations," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 62-88, March.
    4. Choe Chongwoo & Park In-Uck, 2011. "Information, Authority, and Corporate Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-39, February.
    5. Kräkel, Matthias, 2018. "Empowerment and the Dark Side of Delegation," IZA Discussion Papers 11289, Institute of Labor Economics (IZA).
    6. Chongwoo Choe & Shingo Ishiguro, 2022. "Relational Contracts and Hierarchy," Monash Economics Working Papers 2022-08, Monash University, Department of Economics.
    7. Kiyotaki, Fumi & Miyakawa, Toshiji, 2012. "The choice of organizational form under intrafirm bargaining rules," Journal of the Japanese and International Economies, Elsevier, vol. 26(3), pages 369-392.
    8. Pandher, Gurupdesh S. & Vu, Joseph D., 2018. "Divisional managers' compensation to maximize spillovers and cooperation," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 44-54.

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