Centralized vs. decentralized management: an experimental study

Trabajo presentado en el GSBE-ETBC Seminar Fall 2016, organizado por la Maastricht University el 15 de septiembre de 2016We study the tradeoffs between centralized and decentralized management using a new experimental game, the decentralization game. This game models an organization with two divisions and one central manager. Each division must choose or be assigned a product type. Both divisions benefit from coordinating their product types, but each prefers to coordinate on products that are close to its local tastes. The central manager aims to maximize the sum of division payoffs. Which product type achieves this goal varies with taste shocks that are known to the divisions but not the central manager. Under centralization, the central manager assigns products to divisions after receiving the divisions’ messages about the state of the world (i.e., the taste shock); under decentralization, the divisions choose their own products. Contrary to the theory, overall performance is higher under centralization than under decentralization. Communication between divisions and suggestions from central managers modestly improves performance under decentralization. Nonetheless, centralization remains the best-performing organizational form.The authors thank the National Science Foundation (SES-0214310), the Spanish Ministry of Economy and Competitiveness (Grant: ECO2014-59302-P) and the Generalitat de Catalunya (Grant: 2014 SGR 510).Peer reviewe