TY  - JOUR
AU  - Stein,Jeremy C.
TI  - Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7705
PY  - 2000
Y2  - May 2000
UR  - http://www.nber.org/papers/w7705
L1  - http://www.nber.org/papers/w7705.pdf
N1  - Author contact info:
Jeremy C. Stein
Department of Economics
Harvard University
Littauer 209
Cambridge, MA  02138
Tel: 617/496-6455
Fax: 617/496-7352
E-Mail: jeremy_stein@harvard.edu
AB  - This paper assesses different organizational forms in terms of their ability to generate information about investment projects and allocate capital to these projects efficiently. A decentralized approach with small, single-manager firms is most likely to be attractive when information about individual projects is  soft' and cannot be credibly transmitted.  Moreover, holding fixed firm size, soft information also favors flatter organizations with fewer layers of management.  In contrast, large hierarchical firms with multiple layers of management are at a comparative advantage when information can be costlessly hardened' and  passed along within the hierarchy. As a concrete application of the theory, the paper discusses the consequences of consolidation in the banking industry.  It has been documented that when large banks acquire small banks, there is a pronounced decline in lending to small businesses.  To the extent that small-business lending relies heavily on soft information, this is exactly what the theory would lead one to expect.
ER  -