Hierarchies of Processors with Endogenous Capacity
Abstract Capacity is defined as the number of information items a processor can handle in a given time. This note studies the properties of a hierarchy of processors in which the capacities of processors are choice variables. The hierarchy must pay each processor it decides to employ a wage which is an increasing function of the processor's capacity. It is shown that efficient hierarchies tend to be characterized by three simple properties: (i) within any given level, capacity is uniform, (ii) across levels, the higher the level, the higher the capacity, and (iii) no skip-level reporting occurs.Journal of Economic LiteratureClassification Numbers: D21, J31, L23.