Marketing Channel

Centralized and Decentralized Decision Making in Organizations

Jan Zabojnık, University of Southern California and Queen’s ´ ´ ´

University

This article identifies a new type of cost associated with centralization. If workers are liquidity constrained, it may be less costly to motivate a worker who is allowed to work on his own idea than a worker who is forced to follow the manager’s idea. Thus, it may be optimal to let workers decide on the method for doing their job even if managers have better information. This conclusion holds even if more general contracts are considered that are based on communication of information between the worker and the manager, as long as these general contracts are not entirely costless. I believe people will do much more with their bad idea than they will with your good idea. (Dave Checketts, president and CEO of Madison Square Garden [Boeck 1996]) I. Introduction In recent years, many U.S. companies have adopted innovative work practices, frequently including greater decentralization of decision making. In a recent survey of private-sector establishments with 50 or more

I am grateful to Michael Waldman for his invaluable comments and suggestions throughout the development of this article. I would also like to thank Patrick Legros, Robert Gibbons, and the seminar participants at Bristol University, Cornell University, Queen’s University, Stockholm School of Economics, Texas A&M University, University of Pompeu Fabra, University of Rochester, and University of Southern California.

[ Journal of Labor Economics, 2002, vol. 20, no. 1] 2002 by The University of Chicago. All rights reserved. 0734-306X/2002/2001-0001$10.00

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Zabojnık ´ ´

employees, about 45% of nonsupervisory workers directly involved in production had substantial discretion over the method for doing their job (Osterman 1994). An extreme example may be the department store Nordstrom, which issues its workers only one instruction: “Use your own judgment”...