When does coordination require centralization? The roles of organizational inertia and diversity

Abstract

We consider a multidivisional organization’s choice between a decentralized structure and a centralized one. Each division has its own private information and can fully commit to a communication rule. We show that the need for coordination would favor centralization due to the optimality of the decisions. However, if each division has a bias towards inertia, decentralization may be beneficial because the division managers may be unwilling to disclose information to the headquarters due to the conflict of interest caused by the divisions’ inertia biases. We find that decentralization dominates centralization in a larger set of environments in a diverse organization than in a homogeneous organization.