Dessein_Authority_Communication_Password_Removed.docx
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1、Review of Economic Studies (2002) 69, 811838 0034-6527/02/00320811$02.00 c 2002 The Review of Economic Studies Limited Authority and Communication in Organizations WOUTER DESSEIN University of Chicago and CEPR First version received October 1999; final version accepted January 2002 (Eds.) This paper
2、 studies delegation as an alternative to communication. We show that a principal prefers to delegate control to a better informed agent rather than to communicate with this agent as long as the incentive conflict is not too large relative to the principals uncertainty about the environment. We furth
3、er identify cases in which the principal optimally delegates control to an intermediary, and show that keeping a veto-right typically reduces the expected utility of the principal unless the incentive conflict is extreme. 1. INTRODUCTION This paper is concerned with the old saying that knowledge is
4、power. In organizations, much of the information used in decision making is dispersed in the hierarchy. Lower-level managers, for example, are often much better informed about consumer needs, competitive pressures, specialized technologies or market opportunities than their superiors. The financial
5、press is full of stories about how companies have pushed decision rights lower in the hierarchy in order to profit from this local knowledge.1 For the same reason, newly acquired subsidiaries are often left with substantial autonomy. The goal of this paper is to better understand why an uninformed p
6、rincipal (the company owners, senior management) may grant formal decision rights to an agent (senior or middle management) who is better informed but has different objectives. We argue that a principal often delegates authority in order to avoid the noisy communication, and hence the loss of inform
7、ation, which stems from these differences in objectives. At first sight, it may seem a puzzle why keeping authority and letting the agent report would not always weakly dominate delegation. By keeping authority, the principal has always the option to rubberstamp the proposals of the agent, but she m
8、ay also refrain him from implementing projects which are obviously not in the interest of the organization. By delegating authority, in contrast, the principal commits to never reverse the agents decisions. We will nevertheless argue that delegation is typically a better instrument to use the local
9、knowledge of the agent than communication. Key to our analysis is that differences in objectives between principal and agent are often systematic and predictable. It is, for example, well documented that managers may be short-term biased, status-quo biased, risk-averse, empire builders etc. Whenever
10、 the principal and the agent systematically disagree on a certain action dimension, the principal will not rubberstamp a naive recommendation by the agent of his preferred action, but try to correct for the bias in objectives. As the agent is not naive but anticipates this, communication is then inh
11、erently strategic andin equilibriumnoisy. Hence, the central trade-off in our paper is one between a loss of control under delegation and a loss of information under communication. 1. Among firms decentralizing decision rights in the 1990s are AT&T, General Electric, Eastman Kodak, Fiat, Motorola, U
12、nited Technologies, Xerox and, recently, Ford. 811 812 REVIEW OF ECONOMIC STUDIES Model. In order to analyse this trade-off, we develop a stylized model in which the principal (she) must screen among a range of projects which differ from each other on one dimension. The agent (he) has superior infor
13、mation on which project is best for the principal, but his objectives differ in a systematic way. He could, for example, always prefer a larger project than the principal (size-bias). For simplicity, this bias is constant and positive. Section 3 provides a discussion of the kind of biases we have in
14、 mind. The private information of the agent is assumed to be soft, that is the agent cannot prove or certify his knowledge. Furthermore, following Grossman and Hart (1986) and Hart and Moore (1990), we posit that projects (actions) cannot be contracted upon and, hence, the principal cannot use a sta
15、ndard mechanism to elicit the private information of the agent. The principal, however, can contract on the authority over the project. Indeed, to engage in a project, some critical resources are needed which are controlled by the principal. This implies that the agent normally needs the fiat of the
16、 principal to implement a project, but the principal can also delegate decision rights to the agent by granting him the authority over the use of these critical resources. In our organization, the principal thus faces the choice between fully delegating a task to a better informed agent or to order
17、the latter what to do after having consulted him. If she keeps decision rights and consults the agent, a game of strategic communication takes place in which each equilibrium is characterized by a partition of all possible states of nature and where the agent introduces noise into his signal by only
18、 specifying to which partition element the realized state of nature belongs. Given the information provided by the agent, the principal then takes the action which maximizes her expected utility. Such a strategic information transmission has been first analysed by Crawford and Sobel (1982), hereafte
19、r referred to as C S. While communication always involves a loss of information as long a preferences are not perfectly congruent, a central result of their paper is that the closer the preferences of agent and principal, the better is communication. The loss of information even goes asymptotically
20、to zero when differences in objectives disappear. Delegation, in contrast, results in a loss of control since the agent always takes a decision which is biased relative to the first best. Similarly, this loss of control becomes smaller when the agents preferences are closer to those of the principal
21、 and disappears in the limit. At first sight, the optimal allocation of authority is thus not trivial. Results. Our main finding is that the principal optimally delegates control as long as the divergence in preferences is not too large relative to the principals uncertainty about the environment. T
22、hus, if the state of nature is uniformly distributeda standard assumption in almost any application of the CrawfordSobel modelthe principal prefers delegation to communication whenever the agents bias is such that informative communication is feasible. The larger the uncertainty about the environmen
23、t, the larger is the range of biases for which the principal delegates control. More generally, for any given information structure, delegation dominates communication if the bias is sufficiently small. Indeed, for any continuous and twice differentiable distribution, as the agents bias tends to zer
24、o, a principal who keeps control and communicates, will take an action which is on average an infinite times further away from the first best than the action the agent would take. The intuition behind these results lies in the nature of the screening mechanism at work. For the agent to be induced to
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