Designing Organizations in Volatile Markets

Abstract

Multinational and multiproduct firms often experience uncertainty in the relative return of conducting activities in different markets due to, for example, exchange rate volatility or the changing prospects of different products. We study how a multi-divisional organization should optimally allocate decision-making authority to its managerial members when operating in such volatile markets. To be able to adapt its decisions to local conditions, the organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if communication takes the form of verifiable disclosure, then centralized decision-making does not suffer from information asymmetry and it allows the headquarter of the organization to better cope with the inter-market uncertainty. However, a downside of centralization is that it can discourage information acquisition, and this negative effect is amplified by the need for coordinating the activities of different divisions. As a result, the optimality of decentralized decisionmaking can actually be driven by a large coordination motive.

Delegating performance evaluation

“… We do not consider the problem of incentivizing the reviewer to exert costly effort in order to learn some state of nature. This is an interesting but distinct incentive problem which is studied in Aghion and Tirole (), Strausz (), Szalay (), Rahman (), Pei (), and Liu and Migrow (). We also do not examine why the principal does not perform the task of the reviewer herself.…”