Centralization and Decentralisation

 




Organization Centralization and Decentralisation     


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Centralization and Decentralisation     

	Centralisation system is the system where, only the principals have authority to make decisions in an organization. On the other hand, in decentralization all the agents or workers in an organization have authority to express their views and the decisions.
	Centralisation is effective as it strengthens co-ordination in the organization. The top executive team’s competence is very important in the development and continuity of the organization, and this would greatly affect the general economy. This method cuts down the cost of running the organisation as the policies applied in the organization are the same and thus increase the wealth. When resources and urgent information is needed, it works best. However, it is disadvantageous in that; the top managers can easily abuse their powers and authority. It demotivates the lower level managers and agents. It does not offer them opportunity to develop and improve their managerial skills. Though the decisions made are fast, they may not have acquired enough relevant information about a decision.
  	Decentralization being authority to all subordinates’ involvement in decisions making is good as it helps to build up a healthy and wealthy economy. It reduces the work of the top manager. It motivates the workers, and makes them satisfied with their job, and feel secure even when expressing themselves and thus will have an increased production, which will help to improve the economy at large. More so, when involved, their skills and abilities are used in grouping the subordinates to the best position that he fits in the organization (Colombo & Delmastro, 2008). In the end, this will be a benefit to the continuity of the organization even in case of any urgent need of replacements. No one can determine the downfall of the organization and thus offer their best.  However, the decisions making may take too long. Many organization levels cannot be the best with the decentralised as the communication may end up being slow. However, the administrative expenses incurred in this kind of organization are high compared to the centralized.  This is because; it requires trained personnel in all divisions. Uniformity and Co-ordination may be poor as they may lack consistent procedure and enjoy a substantial autonomy (Besley & Coate, 2003)
	A trade-off is the substituting of an opponent when making some decisions. Decentralisation helps to improve the welfare due to diversity in the local preferences and conditions while the centralised economy tends to have less information. By giving the agents’ authority, they tend to have a desire to acquire more information. It also prevents the executives from misusing their powers (Besley & Coate, 2003).
	In the book (Aghion & Tirole, 1997), all organizations have a hierarchy composed of executives represented by (he) to the subordinates (she) who can come up with various project proposals for the organization. Let the number of projects be represented by n of different types (y). The expectation about the project is that he can gain a profit (Fp) and the agent (fp).The (fp) should be the net profit after implementation of the project. When a project is rejected, there is no payoffs and it is represented by, Po=po=0. Both parties must be fully aware of the projects.
Their benefits should be known to be (F) for the principal and (f), the agent. If his preferred project is selected, she receives an expected benefit of (αf) and if hers is favoured, his benefit is(βF).These parameters are due to uninformed situations and they belong to(0.1)^4. However this happens if the projects are relevant and in the end the profit > 0 on one party while the other party profit =0 and vice-versa When a project is chosen by both parties, α=β (Aghion, & Tirole, 1997).
Preferences; with (w) as the wage of the agent, and the executive is risk neutral with utility (Fu) and a project u is most preferred, the agent receives reduced liability and therefore, w≥0. His utility function will be k (w) + Fu, where k is increasing. This assumes that the agent is averse to income risks such as monetary incentives and his wage is zero in the reserves. At the end, the agent’s utility of picking a profitable project is increased to that of the principal during the profit sharing (Aghion, & Tirole, 1997).

Regarding information on the nature of decision from principal to the agent, (Aghion, & Tirole, 1997) assumes that payoff details are not known. Assuming at private cost Ca(r), the agent knows the payoffs of all the candidates with a probability thus he knows nothing on the (1-r) yet the projects remain identical. At the same time, the principal assumed private cost Cp(R) knows the time and effort to devote to learning the payoffs and nothing about the remaining (1-R).The principal may fai