Does Centralization Expose a Firm to Greater Risk?

Gabaix (2011) shows that when the distribution of firm size is sufficiently thick-tailed, independent firm-level shocks can have aggregate consequences. But if such shocks originate from decision-making error, then one might expect such shocks to wash out within the firm unless the importance placed on an individual's decisions is similarly thick-tailed within firms. This paper makes the theoretical claim that centralization leads otherwise-independent shocks to become correlated, because multiple decisions are being made by the same decision maker. This is a necessary feature of increasing returns to scale and scope in production.