Management in Task-Based Organization

This paper provides a microfoundation for the Shannon mutual information as a measure of management in organizations that must complete many tasks. We propose a model where an organization must assign an arbitrarily long sequence of tasks of different types to workers with different skills. Assigning tasks to the best suited worker results in faster production and a lower wage bill but requires greater management, measured as the number of contingency plans that must be developed. We show management is initially increasing returns to scale, but eventually become constant returns to scale and equal to the number of tasks multiplied by a constant which is based on Shannon mutual information. This occurs because the optimal design of large organizations involves core competencies: the organization develops a relatively small number of contingency plans that perform well on a relatively small number of distinct task sequences. As optimal organizations grow, the number of core competencies often become a vanishingly small fraction of the total number of possible sequences, but the contingency plans account for the realized sequence with probability approaching one.