Simulation experiments of resource-allocation decisions in two-level organizations

A model two-level organization consisting of headquarters and two divisions is considered. Headquarters is faced with a decision-problem: to allocate certain scarce resources in a “good” way between the two divisions. Three different methods that can be used to reach that allocation decision are studied. Those three methods are (1) to simply divide the resources equally between the divisions; (2) a method based on an iterative pricing mechanism; and (3) an adaptation of the Dantizig-Wolfe decomposition algorithm. The paper investigates, by means of a set of simulation experiments, the effects of these methods on organizational performance, both as regards overall payoff and divisional payoff. With respect to divisional payoff, a divisional payoff-structure is postulated, and it is examined whether divisional payoff can be improved through “cheating.”