On Intergovernmental Communication: a Tale of Two Decentralization Reforms

Abstract : Motivated by the contrasting experience following the two waves of decentralization in China, we develop a formal model of inter-governmental communication to study the impact of decentralization on economic performance under an authoritarian regime. Decentralization shifts the decision power of policy-making from the central government to the local. The local government has the information advantage, but it also has the loyalty concern, the political incentive to follow the policy prescriptions from the central. We show that the loyalty concern impacts the economic outcome of decentralization by distorting inter-governmental transmission of information as well as final policy-making. A strict adherence to the central could render decentralization welfare- reducing, causing low output and high volatility. We offer several theoretical extensions to highlight the underlying mechanisms and demonstrate the robustness of our results.

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Authority and Information Acquisition in Cheap Talk with Informational Interdependence

Abstract : I study the allocation of decision rights in a two-dimensional cheap talk game with informational interdependence and imperfectly informed senders (agents). The Principal allocates decision rights among all players including herself, thus determining incentives for communication. Delegation is optimal when the expected informational gains outweigh the loss of control due to a biased decision. Because delegation breaks the interdependence between decisions, the informational gains may refer to the decision the Principal retains. This implies that negative informational externalities (Levy and Razin, 2007) can lead to Partial Delegation. I also analyse agents' incentives for information acquisition. An agent invests in a single piece of information when the expected utility gains from revealing it compensate its costs. Truthful communication is thus a necessary condition for information acquisition. But the information transmitted must also have substantial influence on beliefs –i.e. few other agents acquire (and reveal) the same information in equilibrium. As a consequence, the Principal strictly prefers centralization when the cost of information is sufficiently large. When an agent specializes he avoids the possibility of observing contradictory information, enhancing communication incentives. Finally, delegation implies that decision-makers will typically receive more information about the more relevant state, a situation I call ex-post specialization.

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Simon Says? (interpersonal) Authority in Organizations

Abstract : This paper contrasts the efficiency of two coordination mechanisms, decentralized coordination and authority, in resolving coordination problems in organizations. Under decentralized coordination, the agents (subordinates) responsible for different tasks are also responsible for acquiring and sharing information about their tasks and then executing a plan of action. In contrast, under authority, a principal (superior) processes all relevant information and then instructs the subordinates as to what actions to take, and the subordinates choose to follow these instructions without further evaluation. The analysis thus revisits the classic notion of authority as the ability of an individual to instruct others on what to do and to expect obedience, and formalizes it as an endogenous equilibrium information structure of a game. Both types of equilibria can co-exist, with the advantage of authority lying in the strategic management of information made available to the subordinates, which facilitates coordinated adaptation to opportunities without exposing the organization to excessive oportunism. Authority dominates decentralized coordination whenever the parties exhibit moderate patience and cost disadvantage of authority in processing information is not too large.

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