Information processing and organization design

Abstract

This paper examines the optimal structure of an organization in which analysts are hired to process information on behalf of a principal decision-maker whose attention is limited. I focus on the case where information processing exhibits declining complexity. This means that information processing becomes less complex as it progresses. The optimal organization design is determined endogenously as an optimal response to the limitations of the principal decision-maker in her attention to communication and supervision and to the limited processing ability of the analysts. I examine serial and parallel processing structures. I show that the optimal serial structure is ordered by ability. This ordering reflects specialization according to comparative advantage in processing. The choice between a serial structure and a parallel structure involves a tradeoff between the benefits of specialization in the serial structure and lower communication costs in the parallel structure.