Information aggregation and communication in organizations

Operating units must communicate their private information regarding decisions to be taken in organizations. This paper characterizes the optimal communication structures assuming that (i) a decision maker is fired whenever he makes a decision that proves wrong ex post relative to the status quo; and (ii) direct communication in a group of k units may result in the loss of messages with a probability that solely depends on the group size. Several levels of partitioning with direct communication taking place in each group are required. It is shown that there exists a group size that allows communication technology to be exploited optimally: The optimal communication structure is such that it is essentially composed of groups of this size only at every level of partitioning.