Organization Centralization and Decentralisation.

Organization Centralization and Decentralisation.

Organization Centralization and Decentralisation    

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Centralization and Decentralisation    

            Centralisation system is the system where, only the principals have authority to make decisions in an organization. On the other hand, in decentralization all the agents or workers in an organization have authority to express their views and the decisions.

            Centralisation is effective as it strengthens co-ordination in the organization. The top executive team’s competence is very important in the development and continuity of the organization, and this would greatly affect the general economy. This method cuts down the cost of running the organisation as the policies applied in the organization are the same and thus increase the wealth. When resources and urgent information is needed, it works best. However, it is disadvantageous in that; the top managers can easily abuse their powers and authority. It demotivates the lower level managers and agents. It does not offer them opportunity to develop and improve their managerial skills. Though the decisions made are fast, they may not have acquired enough relevant information about a decision.

            Decentralization being authority to all subordinates’ involvement in decisions making is good as it helps to build up a healthy and wealthy economy. It reduces the work of the top manager. It motivates the workers, and makes them satisfied with their job, and feel secure even when expressing themselves and thus will have an increased production, which will help to improve the economy at large. More so, when involved, their skills and abilities are used in grouping the subordinates to the best position that he fits in the organization (Colombo & Delmastro, 2008). In the end, this will be a benefit to the continuity of the organization even in case of any urgent need of replacements. No one can determine the downfall of the organization and thus offer their best.  However, the decisions making may take too long. Many organization levels cannot be the best with the decentralised as the communication may end up being slow. However, the administrative expenses incurred in this kind of organization are high compared to the centralized.  This is because; it requires trained personnel in all divisions. Uniformity and Co-ordination may be poor as they may lack consistent procedure and enjoy a substantial autonomy (Besley & Coate, 2003)

            A trade-off is the substituting of an opponent when making some decisions. Decentralisation helps to improve the welfare due to diversity in the local preferences and conditions while the centralised economy tends to have less information. By giving the agents’ authority, they tend to have a desire to acquire more information. It also prevents the executives from misusing their powers (Besley & Coate, 2003).

            In the book (Aghion & Tirole, 1997), all organizations have a hierarchy composed of executives represented by (he) to the subordinates (she) who can come up with various project proposals for the organization. Let the number of projects be represented by n of different types (y). The expectation about the project is that he can gain a profit (Fp) and the agent (fp).The (fp) should be the net profit after implementation of the project. When a project is rejected, there is no payoffs and it is represented by, Po=po=0. Both parties must be fully aware of the projects.

Their benefits should be known to be (F) for the principal and (f), the agent. If his preferred project is selected, she receives an expected benefit of (αf) and if hers is favoured, his benefit is(βF).These parameters are due to uninformed situations and they belong to(0.1)^4. However this happens if the projects are relevant and in the end the profit > 0 on one party while the other party profit =0 and vice-versa When a project is chosen by both parties, α=β (Aghion, & Tirole, 1997).

Preferences; with (w) as the wage of the agent, and the executive is risk neutral with utility (Fu) and a project u is most preferred, the agent receives reduced liability and therefore, w≥0. His utility function will be k (w) + Fu, where k isincreasing. This assumes that the agent is averse to income risks such as monetary incentives and his wage is zero in the reserves. At the end, the agent’s utility of picking a profitable project is increased to that of the principal during the profit sharing (Aghion, & Tirole, 1997).

Regarding information on the nature of decision from principal to the agent, (Aghion, & Tirole, 1997) assumes that payoff details are not known. Assuming at private cost Ca(r), the agent knows the payoffs of all the candidates with a probability thus he knows nothing on the (1-r) yet the projects remain identical. At the same time, the principal assumed private cost Cp(R) knows the time and effort to devote to learning the payoffs and nothing about the remaining (1-R).The principal may fail to wait till the report on investigation is finished due to time, and ends up accepting the agent’s proposal. The disutility of the effort Ca (.) and Cp (.) are convex and increasing.

Hard information on the payoffs can easily be verified unlike the soft one. In the centralised authority, He can overrule the subordinate as he has formal and real authority over the project choice .He can rubberstamp the agents proposal since α>0 and thus she receives a real authority. According to (Aghion, & Tirole, 1997), under decentralised, she picks her preferred project. In contracts, the payoffs under the allocation of authority under integration utility is   

Kp = R F+ (1-R) rβα-Ca (E)  .........................I where he is uninformed.

 And for the real authority is

Ka=Rβf+ (1-R) rf-Ca(r).............................ii where he chooses his preferred project.

According to (Aghion & Tirole, 1994), as long as the agent does not respond to monetary incentives, the optimal complete contract corresponds to the random authority allocation scheme.

Supposing there are z decisions, n=1... z. This means that each decision has a profit Fn, private benefit fn, congruence parameters αn and βn and efforts Rn and rn.We ignore the incentive constraint to isolate the direct effects and take Rn and rn. The optimal delegation maximizes the principal’s payoffs with her participation constraint. If the principal controls decision n and yn=0, the constraint will be;

When the incentive is ignored, a delegation decision to pay the authority is voluntary (Dessein, 2002). The difference occurs if both parties are aware of the effects and the cost benefit proportion will be equal to the information shared. The effect of congruence parameters and pay-out is clear-cut from an initiative point of view. The company owners and managers representative’s decisions affecting the agents. The decision to link private information to him lies in her hands. Communication shifts principal reaction curve upwards and does not affect the agent’s reaction curve and this affects equilibrium.

The principals are burdened as they have full control of the organization and any new agent and thus require rewarding of the initiative. Real authority increases as the wages increase. When there are several principals, monitoring reduces as the cost function is less convex. (Colombo & Delmastro, 2008).

In conclusion, Decentralisation is good in public goods whereas centralisation is good in institutional arrangements. However, in case of emergency, centralisation is the best. The agents should be involved in the decisions making as they may help in good and analysed decisions. Payoffs and wages should be well decided upon to ensure fairness and encourage the beneficial projects.

References

Aghion, P. & Tirole, J (1997).Formal and real authority in organizations, Journal of Political         Economy, vol. 105(1), pp. 1-29.
Besley, T. And S. Coate, 2003, Centralised Versus decentralized provision of local public             goods: a political economy approach, journal of public economics, vol.87, pp. 2611- 2637

Dessein, W. (2002), “Authority and Communication in Organizations,” Review of Economic

            Studies 69: 811-838.1161.

M. Colombo & Delmastro, M. (2008). The Economics of Organizational     Design: Theoretical     Insights and Empirical Evidence. Palgrave             MacMillan: Hampshire UK.