DP4022 | Real-Time Hierarchical Resource Allocation with Quadratic Costs

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23/08/2003

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Abstract

This Paper presents a model in which boundedly rational members of an administrative staff calculate resource allocations in real time. We consider a class of hierarchical procedures in which information about payoff functions flows up and is aggregated by a hierarchy, while allocations flow down and are disaggregated by the hierarchy with decentralized decision making. We assume that the payoff functions are quadratic and that the payoff parameters follow first-order autoregressive processes. We define a team statistical optimality condition that formalizes the notion of decentralized decision making. We derive a reduced form that can be used to address specific questions about organizational structure and returns to scale.