A theoretical discussion of suboptimization and decentralization to consider the appropriateness of various financial controls, constraints, and incentives. For suboptimization to be useful as an aid to decisionmaking in centralized organizations, marginal rates of substitution among the factors involved must be independent of the value of factors outside the area of suboptimization. A decentralized system would appear to meet these conditions, but there are additional problems--in every case the central authority must devise a system of controls that will hold conflicts between upper and lower levels in the organization within tolerable limits. The analysis is applied to various alternative forms of organization in the Department of Defense: decentralization by services, by service and program, and by services with some reallocation of functions; decentralization by theater; full unification; and decentralization by strengthening the central controls of the present system. 37 pp.