Diskussionsbeiträge des Fachbereichs Wirtschaftswissenschaft der Freien Universität Berlin 2007/10
We analyze the optimal decision-making hierarchy in an organization when decision-makers of limited liability have preferences conflicting with the organizations objective and exert externalities on their counterparts. In a horizontal hierarchy, every decision is made by a different agent. In a vertical hierarchy, one agent is in charge of all decisions. Only this agent is incentivized. This advantage is outweighed if there is a horizontal hierarchy so that the decision-makers preferences are close to the organizations objective with respect to the decision they are in charge of but far from the organizations objective for the other decisions.