This paper examines the efficiency of capital allocation in decentralized and hierarchical firms, focusing on the impact of information quality on organizational design. Decentralized firms, characterized by small, single-manager units, are more effective when dealing with "soft" information, which cannot be credibly transmitted. In contrast, hierarchical firms with multiple layers of management are more advantageous when information can be "hardened" and passed up the chain. The paper uses the example of the banking industry to illustrate these points, noting that large banks tend to reduce lending to small businesses after acquiring smaller banks, as soft information about small businesses is harder to verify and manage. The model suggests that decentralized firms can generate higher expected outputs due to stronger research incentives among line managers, while hierarchical firms benefit from better across-division capital allocation when information can be hardened. The paper also discusses the implications for organizational design, such as the preference for flatter structures in soft information settings and the inefficiencies of bureaucracy in hierarchical structures.This paper examines the efficiency of capital allocation in decentralized and hierarchical firms, focusing on the impact of information quality on organizational design. Decentralized firms, characterized by small, single-manager units, are more effective when dealing with "soft" information, which cannot be credibly transmitted. In contrast, hierarchical firms with multiple layers of management are more advantageous when information can be "hardened" and passed up the chain. The paper uses the example of the banking industry to illustrate these points, noting that large banks tend to reduce lending to small businesses after acquiring smaller banks, as soft information about small businesses is harder to verify and manage. The model suggests that decentralized firms can generate higher expected outputs due to stronger research incentives among line managers, while hierarchical firms benefit from better across-division capital allocation when information can be hardened. The paper also discusses the implications for organizational design, such as the preference for flatter structures in soft information settings and the inefficiencies of bureaucracy in hierarchical structures.