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.