The purpose of this paper is to investigate the optimal allocation of authority within “chain” organizations and to show when partial centralization becomes dominant in the sense of organizational performance.
This paper takes an incomplete contract approach and uses an information transmission framework to investigate the optimal governance structure, in which non-contractible decisions must be adapted to local operating conditions, and also coordinated with the upstream and downstream divisions. We also use simulation analysis to numerically show the theoretical mapping between the underlying parameters (i.e. coordination need) and the dominant organizational structures.
Partial decentralization will arise as the optimal governance structure only when the information in the middle branch is relatively concentrated or dispersive, so as to exploit the underlying information structure in the “chain” organizations. Specifically, when information is highly concentrated, direct control of the middle branch can improve coordination within firms. When the information is highly dispersive, to delegate authority to the middle branch only can improve communication.
This paper characterizes the optimal governance structure in “chain” organizations. The findings may give some enlightenment on real authority driven by ex ante asymmetric information structures and have implications on asymmetric delegation within firms.
The authors would like to thank two anonymous reviewers and the editors for their constructive comments, and all the errors remain ours.
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