DP5678 Technology, Information and the Decentralization of the Firm

Author(s): Daron Acemoglu , Philippe Aghion , Claire Lelarge , John Van Reenen , Fabrizio Zilibotti

Publication Date: May 2006

Keyword(s): decentralization , heterogeneity , learning , the theory of the firm

JEL(s): F23 , O31 , O32 , O33

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP5678.asp.asp

This paper develops a framework to analyze the relationship between the diffusion of new technologies and the decentralization decisions of firms. Centralized control relies on the information of the principal, which we equate with publicly available information. Decentralized control, on the other hand, delegates authority to a manager with superior information. However, the manager can use her informational advantage to make choices that are not in the best interest of the principal. As the available public information about the specific technology increases, the trade-off shifts in favor of centralization. We show that firms closer to the technological frontier, firms in more heterogeneous environments and younger firms are more likely to choose decentralization. Using three datasets of French and British firms in the 1990s, we report robust correlations consistent with these predictions.