Optimal hierarchies with diverse decision makers

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We analyze the optimal decisionmaking hierarchy in an organization when decisionmakers of limited liability have preferences conflicting with the organization's 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 decisionmakers' preferences are close to the organization's objective with respect to the decision they are in charge of but far from the organization's objective for the other decisions. Authority ; Decision Rights ; Incomplete Contracts