Information processing and organization design

Abstract This paper examines the optimal structure of an organization in which analysts are hired to process information on behalf of a principal decision-maker whose attention is limited. I focus on the case where information processing exhibits declining complexity . This means that information 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 ordering reflects specialization according to comparative advantage in processing. The choice between a serial structure and a parallel structure involves a tradeoff between the benefits of specialization in the serial structure and lower communication costs in the parallel structure.