Hierarchical Coordination of Economic Agents

This paper discusses the formation of organizational knowledge of boundedly rational Economic agents and studies the necessity of hierarchical coordination of economic agents. We consider a firm that consists of a management and N subordinated shops. The problem of the firm is to observe a signal from the environment, forecast future demands and distribute the correct amount of a good to each of the shops. There are two uncertainties involved: The aggregate demand follows a Brownian motion and the distribution of the aggregate demand to the shops varies stochastically. At the beginning of the simulation the agents are ignorant about their actions. They learn how to choose their actions by probabilistic update. We study the importance of the organizational structure as a function of the uncertainties the agents are facing. It turns out that there is no need for a management if the environment is purely deterministic or if only the aggregate demand varies stochastically. However, if the disaggregate environment is stochastic, the management as a coordinator for the shops becomes important.