We examine the relationship between the organization of a multi-divisional firm and its ability to adapt production decisions to changes in the environment. We show that even if lower-level managers have superior information about local conditions, and incentive conflicts are negligible, a centralized organization can be better at adapting to local information than a decentralized one. As a result, and in contrast to what is commonly argued, an increase in product market competition that makes adaptation more important can favor centralization rather than decentralization.
Alonso, Ricardo, Wouter Dessein, and Niko Matouschek. "Organizing to Adapt and Compete." American Economic Journal: Microeconomics 7, no. 2 (2015): 158-187.
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