Introduction

This chapter is a contribution to the study of optimal organizational design, a subject of interest to economists for many years but one in which little actual progress has been made. Organizations function by communicating information and coordinating the actions of their members. Both of these activities require the establishment and use of channels for transmitting information between members. The pattern of these communication links is called the organizational structure, or design.

More complex designs allow a fuller sharing of information and a more precise implementation of the desired collective decision. Neglecting the costs of the design and the communication, the more elaborate designs can achieve a higher expected payoff for the organization. Comparing organizational designs requires the computation of the costs of communication itself. It is at this point that economic theory has failed to provide a basis for the analysis, and it is for this reason that the literature on organizational design has not yielded rigorous theoretical results.

Costs of an organizational structure should include all the basic activities in which the organization is involved: collection, storage, retrieval, transmission, and processing of both quantitative and nonquantitative information. The only cost that economists have dealt with, to date, is the cost of transmission. And even here, the metrics in which costs are reckoned are terribly simple. It is in general assumed that each real number transmitted costs the same. The questions typically addressed have been of the form: How many transmissions are needed in order to achieve a particular desired standard of performance? Usually, an efficiency criterion such as Pareto optimality has been the standard.