Managing Shared Understandings in Teams

Abstract: Organizations are often forced to trade off between the twin goals of coordinating their decisions and adapting to changing circumstances. It is easy to coordinate, "everyone do 'A' no matter what'', and sometimes easy to be ready for all circumstances, "you do `A' no matter what, and I'll do `B' no matter what'', but attaining a balance between the two is difficult. In this paper, we build a model of organizational design with two agents who receive signals about an uncertain state of the world in which coordinating both agents actions to the state of the world is optimal, but imperfect coordination and adaptation can have value on their own. In this team-theoretic setting, the designer controls up to three factors of information policy: the quality of the agents' signals, whether they meet to disclose their signals, and how correlated their signals are, i.e., whether they have shared understandings of the state. Ceteris parabis, shared understandings are valuable when both goals are important, signals are sufficiently good, and meetings are costly. Investing in signal quality is valuable when both coordination and adaptation is important, but along the intensive margin, shared understandings and signal quality are substitutes. Finally, meetings are useful when shared understanding is limited and signals are of poor quality.