Coordination and Organization Design: Theory and Micro-Evidence

Abstract

We explore the relationship between the volatility of a firm’s local environment and its organizational structure. Using micro-level data on managers working for a large retailer, we empirically test and provide support for our theory that a more volatile local environment results in more decentralization only when the need for coordination among subunits is low. In contrast, more local volatility is associated with more centralization when coordination needs are high. Our evidence supports the argument that centralized organizations are better at adapting to local shocks when coordination is important. (JEL D22, L23, L81, M11, M54)

Managerial performance evaluation and organizational form

“…Our results also speak to the more recent literature in organizational economics (Aghion et al, 2014;Bloom et al, 2012;Dessein et al, 2022;Van Doorn & Volberda, 2009). Dessein (2002), Alonso et al (2008), andRantakari (2008) analyze strategic communication between headquarters and risk-neutral managers in decentralized and centralized organizations.…”

“…Our results imply that this advantage is increasingly outweighed by risk premia that need to be paid to risk-averse managers, depending on the degree of risk-aversion and the degree of uncertainty. Empirical studies may use these factors to explain the wide variety of organizational forms observable in practice (Bloom et al, 2012;Dessein et al, 2022;Van Doorn & Volberda, 2009).…”

“…Rantakari (2013) endogenizes incentive systems and finds that the optimal level of integration is decreasing in the volatility of the environment and that the use of firm-wide incentives is increasing in the level of integration. Dessein et al (2022) find empirical evidence for a more widespread use of decentralized organizations in response to more uncertain business environments when coordination needs are small or moderate. The flexibility advantage of decentralization plays a central role in this literature (Bartlett & Ghoshal, 2002;Zhou, 2015).…”