Authority and communication in firms

Abstract

We show that decision making in organizations is typically more complicated than simply choosing either to delegate or to centralize. Firms have to consider not only the level at which a decision is made (authority location) but also how many people are involved (authority diffusion), and the type of communication. Utilizing a unique data set, we estimate a latent-class model to identify frequently adopted combinations of decision-making rights and communication across different hierarchical levels relating to the implementation of a significant change. We identify four typical authority/communication structures that can be loosely categorized as: authoritarian centralization; team decision making; consultative centralization; and decentralization. We then explore the relationships between these four authority/communication structures and other characteristics of the firm, such as the size of the organization, worker skills, long-term employer-employee relationships, individual and group incentives and how close the firm is to the productivity frontier. These results are broadly consistent with recent advances in theory, although no one model is rich enough to fully describe all our findings.