Hierarchies and the Organization of Knowledge in Production.pdf

Hierarchies and the Organization of Knowledge in Production Luis Garicano University of Chicago This paper studies how communication allows for the specialized ac- quisition of knowledge. It shows that a knowledge-based hierarchy is a natural way to organize the acquisition of knowledge when matching problems with those who know how to solve them is costly. In such an organization, production workers acquire knowledge about the most common or easiest problems confronted, and specialized prob- lem solvers deal with the more exceptional or harder problems. The paper shows that the model is consistent with stylized facts in the theory of organizations and uses it to analyze the impact of changes in production and information technology on organizational design. I. Introduction Organizations exist, to a large extent, to solve coordination problems in the presence of specialization. As Hayek (1945, p. 520) pointed out, each individual is able to acquire knowledge about a narrow range of problems. Coordinating this disparate knowledge, deciding who learns what, and matching the problems confronted with those who can solve them are some of the most prominent issues with which economic or- ganization must deal. Yet, with a few recent exceptions, most previous economics literature has equated the study of organizations with the study of incentive prob- I thank Sherwin Rosen and Kevin M. Murphy for numerous comments and suggestions. I am also indebted to Banito Arrun˜ada, Gary S. Becker, Cristina Bellido, Patrick Bolton, Philip Bond, Robert Gertner, Tom Holmes, John Matsusaka, Derek Neal, Canice Pren- dergast, Michael Raith, John Roberts, Antoinette Schoar, David Soskice, Timothy Van Zandt, an anonymous referee, and numerous seminar participants for their helpful comments. [Journal of Political Economy, 2000, vol. 108, no. 5]