The Dynamics of Authority in Innovating Organizations

Abstract

Why do innovative organizations often reallocate authority? I propose a simple theory in which innovation with new technologies generates an endogenous need for coordination among divisions in the presence of negative cross-divisional externalities. A division manager has private information about the expected productivity of new technologies, which can be communicated strategically to headquarters. The organization has an advantage in coordinating technologies across divisions and can only commit to an ex-ante allocation of authority. I show that a reallocation of authority (i.e., delegation followed by centralization) can be an optimal response to localized information within an organization. Generally, the decision to reallocate authority depends on the outcome of past innovation.