INFORMATION-PROCESSING AND ORGANIZATION DESIGN

This paper examines the optimal structure of an organization in which analysts are hired to process information on behalf of a principal dec ision-maker whose attention is limited. I focus on the case where info rmation processing exhibits declining complexity. This means that info rmation processing becomes less complex as it progresses. The optimal organization design is determined endogenously as an optimal response to the limitations of the principal decision-maker in her attention to communication and supervision, and to the limited processing ability of the analysts. I examine serial and parallel processing structures. I show that the optimal serial structure is ordered by ability. This o rdering reflects specialization according to comparative advantage in processing. The choice between a serial structure and a parallel struc ture involves a tradeoff between the benefits of specialization in the serial structure and lower communication costs in the parallel struct ure.