Discussion of Centralization Versus Delegation and the Value of Communication.

The article focuses on recognizing the implications of costly communication for optimal organizational design. Delegation is commonly observed in organizations and accepted by organizational theorists as valuable. By contrast, previous work in optimal organizational design had shown the weak superiority of communication-based centralization mechanisms, i.e., revelation mechanisms, over direct delegation mechanisms. Such comparisons, however, had been based only on the benefits or gross performance of the two forms of organization and did not recognize the costs of making or receiving communications, as evidenced by the existence of limited channels of communication and the limited ability of humans to process information. Recognizing that incorporation of these costs would move preferences away from communication-based centralized organizations and toward delegation mechanisms, management researchers Nahum D. Melumad and Stefan Reichelstein chose to investigate the conditions under which any positive such cost would guarantee a strict preference.