Information Processing Hierarchies
Abstract This paper characterizes optimal stationary hierarchies based on an information processing model introduced by Radner. We show how the delay, size (number of processors), capacity (the size of each cohort processed), and throughput (frequency of cohort arrival) are related and determine a feasibility frontier in the space of these variables. The structure of efficient hierarchies implementing the points on the feasibility frontier is also specified. These structures are always nonregular; i.e., every agent has subordinates from several different levels. The nature of the long accepted maxim of decreasing returns to scale in management hierarchies is demonstrated. When the production function of the hierarchy is taken to be the number of information items it can process, we find that returns to size and delay are always decreasing in efficient hierarchies, but these variables are complementary in the design problem. Finally, we discuss how the underlying abilities of the processors affect the marginal returns to size and delay. Journal of Economic Literature Classification Numbers: L22, D83.