Centralization

1. Centralization Augustin Landier

2. Background Coordination/externality A2 A1 Info about envirt

3. Hierarchies • 2 functions of hierarchies: • Extracting/Aggregating Info • Allocating Tasks/decisions • 2 functions of authority (CEO): • Taking decisions • Organizational design: defining rule of games, allocating decision rights etc. (tight frontier between executive and regulatory power)

4. Conflict-free hierarchies • Hierarchies emerge from • the optimality of parallell info processing (Radner) • Matching problems with human capital (Garicano) • At what level should decision be taken? • Trade-off between Coordination and local adaptation (rules vs. discretion)

5. Dessein and Santos (2003) • Trade-off between coordination, specialization and adaptation. • complementarity between task-bundling, adaptativeness, horizontal communication. • E.g. a more volatile environment leads to an increase in the 3 dimensions. • Here, the margins are purely technological

6. Horizontal communication • Under explored: description of the wiring. • Towards a theory of production. • Codes : Cremer-Garicano-Prat. Trade-off between communication between services and within service. Interesting aspect: path dependence

7. Conflict based organization design Outside owner CEO A2 A1

8. The role of empowerment • Stories a la Aghion-Tirole: Give right ex-ante incentives for A to look for info. For that, P needs to commit not to interfere. • More delegation if: • A has comparative advantage at extracting info • Not too much misalignment of preferences

9. Dessein 2000: ex-post inefficiency: A has info but might strategically hide it (cheap-talk) and therefore communication has low quality if P has all power. • Stein 2002: decentralized vs. hierarchical firms. Trade-off bet. Internal capital markets and incentives: multitasking between soft and hard info. Integration biases managers towards hard-info (influence costs).

10. Empirical relevance • Berger&al. (2002) • Liberti (2002) • Rajan-Wulf: the flattening hierarchy

11. Focus vs. synergies • Multitask between synergistic and focussed projects. • In integrated firms, Managers are afraid of their asset being involved in synergistic project of another division. • In general equilibrium, focussed companies coexist with conglomerates. The first have a disciplining role on the latter.

12. Hart-Holmstrtom • Ex-post inefficiency • Trade-off between coordination and private benefits. • What I like in HH: • Putting structure on private benefits • (it is important to understand how people consume their jobs) • Focus on leadership

13. Levin-Rayo • Relational capital determines budget for punishments. • Optimal to concentrate it on one party: power should be concentrated.

14. Question 1: Contractibility • Important to investigate what contingent contracts are possible within organization. • Ex: is it possible to compensate a researcher for the value of his discoveries? • Accounting technology. CEO has power on accounting. Important for

15. Question 2: monitoring the CEO • CEO has mix of executive and regulatory power. He defines largely what role he plays in the game. • >>Impeachment rules are important • Limiting rent extraction • Ensuring good fit • Why don’t we see mandates like in govt ? (is the scope for distortions bigger?) • 2 themes: • Upwards pressure in the hierarchy, • Legitimacy.

16. Question 3: Changing Organizations • Most approaches are very static (exception is Rajan-Zingales) • Theme is emerging in VC literature: VC is about professionalizing start-ups, ejecting founder when appropriate. • What triggers change? How does it happen? • Pressure from outside>mkt for control literature • From within? Putches? • Why do organizations age? How do they get stuck? • Technological adjustment costs. • Conflicts (dynamic version of socialism idea) • What is the memory of organizations?

17. Innovation: The Production Function of Ideas • Current literature focus on ‘how to protect ideas’ • Open question is: how can organization design • Favor or prevent apparition of new ideas? • Affect the nature of new ideas? • Ex. 3M

18. Innovation and sabotage • New ideas reallocate power inside firms. • >> difficult to evaluate ideas: some parties will deny feasability.

19. Corporate culture • Common values/beliefs/Norms • Role of leadership • Upside: coordination + “commitment”+ “control” everybody using the same projection • Downside: blind-spots, resistance to change (hysteresis)

20. Corporate culture • March 91: “Exploration and Exploitation in organizational learning”. Code=beliefs about sate of the world. Proba poisson p1 that new individual converts his beliefs to code. Proba Poisson p2 that code updates false beliefs of an individual who is right. Turnover rate. Evolutionary flavor. Fast individual learning from the code has positive effect on individual knowledge but negative on the adaptation of the code since the code learns only from deviant beliefs. • Effect of exogenous turbulence: sclerotic stable code • Competition and the importance of relative performance

21. Empirical work from managt lit. • Kotter-Heskett 92, Di tomaso 92: mean performance increases with strength of culture. Impact is stronger in more competitive markets. • Sorensen 2002: strong culture leads to less volatile performance. Not if environment is volatile.

22. Organizing for change • Huge popular business lit. • Christensen: the innovator’s dilemma • Andy Groove: only the paranoid survives • Schein (97)

23. Social Networks/Social norms • Managers do what feels “appropriate” • >managerial decisions embedded in social networks of managers. • Ex1: literature on boards interlocks.Davis 91: The adoption of the poison-pill. • Ex2 : Silicon valley: across firm communication is crucial. • The dynamics of social norms: how standards can degenerate.

24. references • Schein, E., Organizational Culture and Leadership, 1992 • Simon, H. Bounded Rationality and Organizational learning, Organization Science, feb. 1991 • Exploration and Exploitation in Organizational learning, Organization Science, feb 1991.