Adaptive Organizations∗

This paper is concerned with the three-way trade-off between coordination, specialization and adaptation, and its implications for organizational design. Every organized activity gives rise to two conßicting requirements: the division of labor into manageable tasks and the coordination of these tasks to ensure harmonious execution. In a stable environment, however, coordination can be trivially achieved by letting employees blindly stick to a set of prescribed guidelines. Thus, the demand for coordination is endogenous and depends on how ‘adaptive’ the organization is to an uncertain environment. We show how this endogenous demand for coordination results in strong complementarities between organizational decision variables: task specialization, employee discretion, the quality of horizontal coordination, and the size of management. Moreover, in contrast to previous claims in the literature, the degree of task interdependence and improvements in communication technology are shown to have a decidedly ambiguous impact on specialization and the division of labor. ∗We thank Gary Becker, Mathias Dewatripont, Jonathan Levin, Kevin Murphy, Canice Prendergast, and John Roberts for their comments.