Network mechanisms, informational efficiency, and hierarchies

Our model of network mechanisms studies individually addressed messages between any two members of an organization. For a given organizational objective function, wt examine communication costs, as measured by the number of message variables that agents need to exchange at equilibrium in order to achieve the desired action choices. Fur the class of objective functions we consider. price mechanisms are shown to minimize communication costs. IT cine requires the network tu be hierarchical, the organization may be forced to use more message variables. We identify the increase in communication tests associated with alternative hierarchies. (C) 1998 Academic Press.