Economics Research Institute Study Paper
Utah State University Department of Economics
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Multi-plant organizations have trouble including both local and global information in their decisions. Outlets know local conditions but headquarters is able to coordinate outlets. In allocating decision-making power, firms must balance coordination and flexibility. I model this tradeoff, and show that the decentralized firm may standardize to avoid costs due to miscoordination. That is, increasingly variable local conditions cause decentralized choices to become less variable. Ex ante, decentralization is more profitable; neither form dominates ex post. Signals from outlets to headquarters improve the performance of the centralized firm, but one can always find conditions under which decentralization is preferred.
Hunnicutt, Lynn, "One Boss Or Many? Decision Making and Coordination in the Multi-Plant Firm" (2000). Economic Research Institute Study Papers. Paper 208.