Centralized and Decentralized Decision-Making in Organizations

This paper 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 about 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