Firm Structure, Search and Environmental Complexity

In this paper we explore the information processing problem of the firm by modeling the firm as type of network, which is comprised of two kinds of agents, ’searchers’ and ’managers.’ The searchers explore the external environment and report the information to the managers. We study the role of centralization/decentralization in organizational structure to see how it affects performance of a firm. Centralization is defined in terms of the level at which decisions are made. We assume the information processing organization is arranged hierarchically, but that decisions can be made at different levels, and thus centralization directly relates to the quantity of information used in making a decision. We model the external environment as an NK landscape. Via simulations, we explore which type of organizational structure and level of decision making maximizes firm profits, given the complexity of the environment.