On the Design of Hierarchies: Coordination versus Specialization

We consider an economy that has to decide how assets are to be used. Agents have ideas, but these ideas conflict. We suppose that decision-making authority is determined by hierarchy. Specifically, each asset has a chain of command, and the most senior person in the chain exercises authority. If a senior person does not need access, he defers to junior person. We analyze the optimal hierarchical structure given that different agents have different tasks: some agents coordinate and others specialize. Our theory throws light on the optimal degree of decentralization inside a firm and on firm boundaries.