Economic Perspectives III

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Centralized Vs. Decentralized Decision Making

So far we have seen how a single homo economicus might benefit from received information. Now, let us look at the bigger picture, and look for ways to combine a couple of these rational decision-makers into an organization. The next hypothesis takes a stab at the issue of their efficient coordination in the context of information and productivity.

Hypothesis 3: Centralized decisions promote decision consistency, global perspective, and avoid wasteful duplication. Decentralized decisions promote data gathering, distributed incentives, and adaptation. Productivity increases to the extent that distributing control optimally balances these factors in light of complementarity and indispensability.

In general terms, hypothesis 3 identifies some of the tradeoffs between centralized and decentralized decision making in organizations. These tradeoffs suggest an optimal balance between the two polar strategies, a balance that undoubtedly shifts under changing environmental conditions. In the following slides, we will show how a changing environment can make one of these strategies more desirable than the other.

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