Centralization

1
Centralization

• Augustin Landier

2
Background
Coordination/externality
A2
A1
Info about envirt
3
Hierarchies

• 2 functions of hierarchies
• Extracting/Aggregating Info
• Allocating Tasks/decisions
• 2 functions of authority (CEO)
• Taking decisions
• Organizational design defining rule of games,
  allocating decision rights etc.
• (tight frontier between executive and regulatory
  power)

4
Conflict-free hierarchies

• Hierarchies emerge from
• the optimality of parallell info processing
  (Radner)
• Matching problems with human capital (Garicano)
• At what level should decision be taken?
• Trade-off between
• Coordination and local adaptation
• (rules vs. discretion)

5
Dessein and Santos (2003)

• Trade-off between coordination, specialization
  and adaptation.
• complementarity between task-bundling,
  adaptativeness, horizontal communication.
• E.g. a more volatile environment leads to an
  increase in the 3 dimensions.
• Here, the margins are purely technological

6
Horizontal communication

• Under explored description of the wiring.
• Towards a theory of production.
• Codes Cremer-Garicano-Prat.
• Trade-off between communication between services
  and within service.
• Interesting aspect path dependence

7
Conflict based organization design
Outside owner
CEO
A2
A1
8
The role of empowerment

• Stories a la Aghion-Tirole
• Give right ex-ante incentives for A to look for
  info. For that, P needs to commit not to
  interfere.
• More delegation if
• A has comparative advantage at extracting info
• Not too much misalignment of preferences

9

• Dessein 2000 ex-post inefficiency A has info
  but might strategically hide it (cheap-talk) and
  therefore communication has low quality if P has
  all power.
• Stein 2002 decentralized vs. hierarchical firms.
  
• Trade-off bet. Internal capital markets and
  incentives multitasking between soft and hard
  info. Integration biases managers towards
  hard-info (influence costs).

10
Empirical relevance

• Bergeral. (2002)
• Liberti (2002)
• Rajan-Wulf the flattening hierarchy

11
Focus vs. synergies

• Multitask between synergistic and focussed
  projects.
• In integrated firms, Managers are afraid of
  their asset being involved in synergistic project
  of another division.
• In general equilibrium, focussed companies
  coexist with conglomerates. The first have a
  disciplining role on the latter.

12
Hart-Holmstrtom

• Ex-post inefficiency
• Trade-off between coordination and private
  benefits.

• What I like in HH
• Putting structure on private benefits
• (it is important to understand how people consume
  their jobs)
• Focus on leadership

13
Levin-Rayo

• Relational capital determines budget for
  punishments.
• Optimal to concentrate it on one party power
  should be concentrated.

14
Question 1 Contractibility

• Important to investigate what contingent
  contracts are possible within organization.
• Ex is it possible to compensate a researcher for
  the value of his discoveries?
• Accounting technology. CEO has power on
  accounting. Important for

15
Question 2 monitoring the CEO

• CEO has mix of executive and regulatory power. He
  defines largely what role he plays in the game.
• gtgtImpeachment rules are important
• Limiting rent extraction
• Ensuring good fit
• Why dont we see mandates like in govt ?
• (is the scope for distortions bigger?)
• 2 themes
• Upwards pressure in the hierarchy,
• Legitimacy.

16
Question 3 Changing Organizations

• Most approaches are very static (exception is
  Rajan-Zingales)
• Theme is emerging in VC literature VC is about
  professionalizing start-ups, ejecting founder
  when appropriate.
• What triggers change? How does it happen?
• Pressure from outsidegtmkt for control literature
• From within? Putches?
• Why do organizations age? How do they get stuck?
• Technological adjustment costs.
• Conflicts (dynamic version of socialism idea)
• What is the memory of organizations?

17
Innovation The Production Function of Ideas

• Current literature focus on how to protect
  ideas
• Open question is how can organization design
• Favor or prevent apparition of new ideas?
• Affect the nature of new ideas?
• Ex. 3M

18
Innovation and sabotage

• New ideas reallocate power inside firms.
• gtgt difficult to evaluate ideas some parties will
  deny feasability.

19
Corporate culture

• Common values/beliefs/Norms
• Role of leadership
• Upside
• coordination commitment control
• everybody using the same projection
• Downside blind-spots, resistance to change
  (hysteresis)

20
Corporate culture

• March 91 Exploration and Exploitation in
  organizational learning.
• Codebeliefs about sate of the world.
• Proba poisson p1 that new individual converts his
  beliefs to code.
• Proba Poisson p2 that code updates false beliefs
  of an individual who is right.
• Turnover rate.
• Evolutionary flavor.
• Fast individual learning from the code has
  positive effect on individual knowledge but
  negative on the adaptation of the code since the
  code learns only from deviant beliefs.
• Effect of exogenous turbulence sclerotic stable
  code
• Competition and the importance of relative
  performance

21
Empirical work from managt lit.

• Kotter-Heskett 92, Di tomaso 92 mean performance
  increases with strength of culture. Impact is
  stronger in more competitive markets.
• Sorensen 2002 strong culture leads to less
  volatile performance. Not if environment is
  volatile.

22
Organizing for change

• Huge popular business lit.
• Christensen the innovators dilemma
• Andy Groove only the paranoid survives
• Schein (97)

23
Social Networks/Social norms

• Managers do what feels appropriate
• gtmanagerial decisions embedded in social networks
  of managers.
• Ex1 literature on boards interlocks.Davis 91
  The adoption of the poison-pill.
• Ex2 Silicon valley across firm communication
  is crucial.
• The dynamics of social norms how standards can
  degenerate.

24
references

• Schein, E., Organizational Culture and
  Leadership, 1992
• Simon, H. Bounded Rationality and Organizational
  learning, Organization Science, feb. 1991
• Exploration and Exploitation in Organizational
  learning, Organization Science, feb 1991.