Organization of Decision-making at the Firm: Just Cost-benefit Optimization or Something More?

Irina Levina (Higher School of Economics)

Abstract: What determines the degree to which firms decentralize strategic decision-making? While the existing theoretical and empirical literature has mainly considered factors that form economic costs and benefits of decentralization for a given firm in a given environment, in this paper we focus on the role of the CEO’s personal motives (preferences) in shaping the organization of decision-making at the firm. The empirical analysis of the paper is based on the data of extensive firms’ survey “European Firms in a Global Economy”, which was conducted in 2010 in 7 European countries: Austria, France, Germany, Hungary, Italy, Spain and United Kingdom. We exploit information about CEOs’ gender and relation to owners to proxy for CEOs’ preferences: men and CEOs-owners are likely to receive higher ‘amenity value’ from keeping more strategic decisions under their personal responsibility. We find that firms run by men are less likely to be decentralized. Firms managed by owners or members of their families have substantially lower chances to decentralize decision-making. The latter effect is observed in all countries covered by the data, and in some countries is extraordinarily strong. Given the importance of decentralization for firm growth and development, these results can have important implications for economics of the firm.