Optimal Coordination in Hierarchies

Abstract

This paper studies the optimal allocation of coordination responsibilities in organizations where duplication of eort is a serious concern. The planner's objective is to minimize a weighted average of the wage bill and the cost of delay. The paper provides conditions under which, in balanced hierarchies, communication eort is increasing and the span of control is decreasing as one travels up the hierarchy, with equalities holding if wages are negligible relative to the weight attached to the cost of delay. The analysis suggests that concerns for fast decision-making may be key in explaining the recent trend towards empowerment in …rms. Several variants of the basic model are studied, including one focusing on communicative skills and another in which, as urgency increases, the optimal span of control increases and the hierarchy ‡attens. Evidence supporting these results is discussed.