Li Xueheng

Hierarchy and nestedness in networked organizations

Abstract: I use a network approach to study how a planner designs the interaction structure—who interacts with whom, and to what extent—between a set of agents. The agents' actions exhibit strategic complementarities—such complementarities appear in workplaces and many social and economic activities. I show that the optimal interaction structure, as represented by an optimal network, must be hierarchical such that all agents have different centrality, leading to unequal payoffs. Hierarchy and inequality arise at optimum even if all agents are ex ante identical and regardless of whether the planner aims at maximizing aggregate efficiency, or has a preference for equality. I propose a new concept—nested core-periphery network—to characterize optimal networks with weighted and directed links under strategic complementarities.