Delegation of decisions and information processing in hierarchies

The paper attempts to integrate important determinants of delegation and decentralized information processing in a single model. The objective is to determine where frequently recurring decisions should take place in a given hierarchy and how often the related information processing should be performed. The model is based on Meagher, Orbay, and Van Zandt (2003), who examine how a firm's changing environment and the bounded rationality of its managers interacts as determinants of its size. A consequence of the assumed bounded rationality is that aggregating and processing information along the hierarchy takes time which might lead to decisions based on obsolete information. By delegating the decision to agents on lower hierarchical tiers, the delay but also the quantity of considered information decreases while costs of control increase. A high environmental volatility emphasises the timeliness of information and suggests a delegation of the decision to agents on lower hierarchical tiers in combination with a high frequency of the related information processing. When costs of control become more important, the decisions take place at the upper tiers.