Information processing capacities of the firm

We analyze the informational structure of a one-top and one-subordinate organization of the firm facing an uncertain environment. Before the realization of the true state, the top manager must choose the information processing capacity of the subordinate, which is an ability to discern the local aspect of the environment and depends upon the global aspect of the environment observed by the top manager. We examine how uncertainty in the environment affects the degree of specialization in the optimal capacity and the amount of knowledge resources in the firm, and discuss its implications for comparisons between Japanese management and American management. J. Japan. Int. Econ., September 1987, 1(3), pp. 299-326. Graduate School of Business, Stanford University, Stanford, CA 94305.