When Does Adaptation Require Decentralization?

Abstract

We examine the relationship between the organization of a firm and its ability to adapt to changes in the environment. We show that even if lower-level managers have superior information about their local conditions, and incentive conflicts are negligible, a centralized organization can be better at adapting to changes in the environment than a decentralized one. We then show that this result reverses some of the standard intuitions about organizational structure. For instance, an increase in competition that makes adaptation more important can favor centralization over decentralization.