Quarterly Journal of Economics, 122, November 2007, pp. 1759-1799
This paper looks at how the kind of information used by a business affects its organization.
Young firms, firms in diverse environments, and high-tech firms tend to be less centralized.
- Conventional wisdom suggests that firms are becoming less centralized as technology spreads.
- In this paper, we consider firms to be more centralized when they are organized into profit centers, and less centralized when they are divided into divisions according to production or cost.
- In decentralized firms, the firm’s head delegates more decisions to managers, whose interests can align with his or diverge.
- Data from British and French firms shows that young firms that deal with frequent change or many different business conditions (heterogeneity) and high-tech firms are more likely to be decentralized.
- The best explanation is that on the frontier, the firm’s head has less valuable information than the managers. Less valuable public information is available.
- Heterogeneity makes it difficult for one to learn from other’s experiences.
- Young firms have less opportunity to learn from their own history.