THE FIRM AS A COMMUNICATION-NETWORK

This paper analyzes how organizations can minimize costs of processing and communicating information. Communication is costly because it tak es time for an agent to absorb new information sent by others. Agents can reduce this time by specializing in the processing of particular t ypes of information. When these returns to specialization outweigh cos ts of communication, it is efficient for several agents to collaborate within a firm. It is shown that efficient networks involve centraliza tion, that individuals delegate tasks to subordinates only if they are overloaded, and that the number of transits to the top tends to be eq ualized across individual information items.