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Centralization versus Decentralization as a Risk-Return Trade-Off

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  • Alessandra Arcuri
  • Giuseppe Dari-Mattiacci

Abstract

This paper characterizes the choice between centralization and decentralization as a risk-return trade-off and examines it in a model that integrates ideas from committee decision-making and portfolio theories. Centralization, by pooling expertise, rarely yields erroneous decisions; however, when it fails, the consequences are global. In contrast, in a decentralized system, erroneous decisions are more frequent, but their consequences are locally confined. We assess the relative desirability of (de-)centralization in various scenarios with independent versus interdependent risks. We further discuss the robustness of the model and the relevance of our results for policymaking. (c) 2010 by The University of Chicago. All rights reserved.

Suggested Citation

  • Alessandra Arcuri & Giuseppe Dari-Mattiacci, 2010. "Centralization versus Decentralization as a Risk-Return Trade-Off," Journal of Law and Economics, University of Chicago Press, vol. 53(2), pages 359-378, May.
    • Handle: RePEc:ucp:jlawec:v:53:y:2010:i:2:p:359-378
    DOI: 10.1086/599623
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    2. Franziska Weber, 2013. "European integration assessed in the light of the ‘rules vs. standards debate’," European Journal of Law and Economics, Springer, vol. 35(2), pages 187-210, April.
    3. Kimiko Terai & Amihai Glazer, 2014. "Insufficient Experimentation Because Agents Herd," Keio-IES Discussion Paper Series 2014-008, Institute for Economics Studies, Keio University.
    4. Charles F. Manski, 2015. "Randomizing Regulatory Approval for Adaptive Diversification and Deterrence," The Journal of Legal Studies, University of Chicago Press, vol. 44(S2), pages 367-385.

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