Marketing vs Engineering: Who Should Decide?

A production process involves a major shareholder and two privately informed agents, a marketing division and an engineering unit. Production requires co-ordinated decision making. It might be carried in a centralized organization or through delegated contracting in a hierarchical structure. We compare the perfor-mance of different organizational structures when renegotiation of initial contracts is possible. We show that delegated contracting always dominates centralization if the downstream contract between the agents is observable. Contracting (respec-tively control) should be delegated to the agent with the least (respectively most) important information. If downstream contracts are not observable, we obtain a tradeoff between centralization and delegation depending on parameter values