[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/bge/wpaper/854.html
   My bibliography  Save this paper

Centralized vs. Decentralized Management: an Experimental Study

Author

Listed:
  • Jordi Brandts
  • David J. Cooper
Abstract
We introduce a new game to the experimental literature and use it to study how behavioral phenomena affect the tradeoffs between centralized and decentralized management. Our game models an organization with two divisions and one central manager. Each division must choose or be assigned a product. Ignoring asymmetric information, the underlying game is an asymmetric coordination game related to the Battle of the Sexes. In equilibrium, the divisions coordinate on identical products. Each division prefers an equilibrium where the selected products are closest to its local tastes while central management prefers the efficient equilibrium, determined by a randomly state of the world, which maximizes total payoffs. The state of the world is known to the divisions, but the central manager only learns about it through messages from the divisions who have incentives to lie. Contrary to the theory, overall performance is higher under centralization, where the central manager assigns products to divisions after receiving messages from the divisions, than under decentralization where the divisions choose their own products. Underlying this, mis-coordination is common under decentralization and divisions fail to use their information when they do coordinate. Mis-coordination is non-existent under centralization and there is a high degree of truth-telling by divisions as well. Performance under centralization is depressed by persistent sub-optimal use of information by center managers.

Suggested Citation

  • Jordi Brandts & David J. Cooper, 2015. "Centralized vs. Decentralized Management: an Experimental Study," Working Papers 854, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:854
    as

    Download full text from publisher

    File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/854.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jordi Brandts & David J. Cooper, 2007. "It's What You Say, Not What You Pay: An Experimental Study of Manager–Employee Relationships in Overcoming Coordination Failure," Journal of the European Economic Association, MIT Press, vol. 5(6), pages 1223-1268, December.
    2. Vincent P. Crawford & Uri Gneezy & Yuval Rottenstreich, 2008. "The Power of Focal Points Is Limited: Even Minute Payoff Asymmetry May Yield Large Coordination Failures," American Economic Review, American Economic Association, vol. 98(4), pages 1443-1458, September.
    3. Dilip Mookherjee, 2006. "Decentralization, Hierarchies, and Incentives: A Mechanism Design Perspective," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 367-390, June.
    4. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 1-48.
    5. Terracol, Antoine & Vaksmann, Jonathan, 2009. "Dumbing down rational players: Learning and teaching in an experimental game," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 54-71, May.
    6. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September.
    7. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points � experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
    8. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    9. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-248, March.
    10. Uri Gneezy, 2005. "Deception: The Role of Consequences," American Economic Review, American Economic Association, vol. 95(1), pages 384-394, March.
    11. Ichniowski, Casey & Shaw, Kathryn & Prennushi, Giovanna, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, American Economic Association, vol. 87(3), pages 291-313, June.
    12. David Danz & Dietmar Fehr & Dorothea Kübler, 2012. "Information and beliefs in a repeated normal-form game," Experimental Economics, Springer;Economic Science Association, vol. 15(4), pages 622-640, December.
    13. Russell Cooper & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1989. "Communication in the Battle of the Sexes Game: Some Experimental Results," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 568-587, Winter.
    14. Wouter Dessein & Luis Garicano & Robert Gertner, 2010. "Organizing for Synergies," American Economic Journal: Microeconomics, American Economic Association, vol. 2(4), pages 77-114, November.
    15. Catherine Thomas, 2011. "Too Many Products: Decentralized Decision Making in Multinational Firms," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 280-306, February.
    16. Colin F. Camerer & Roberto A.Weber, 2012. "Experimental Organizational Economics [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    17. COOPER, R. & DEJONG, D.V. & FORSYTHE, R. & Tom Ross, 1989. "Communication In The Battle Of The Sexes Game," Carleton Industrial Organization Research Unit (CIORU) 89-03, Carleton University, Department of Economics.
    18. Blume, Andreas & Ortmann, Andreas, 2007. "The effects of costless pre-play communication: Experimental evidence from games with Pareto-ranked equilibria," Journal of Economic Theory, Elsevier, vol. 132(1), pages 274-290, January.
    19. David M. Grether, 1980. "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 537-557.
    20. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2015. "Organizing to Adapt and Compete," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 158-187, May.
    21. Gary Charness & Dan Levin, 2005. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," American Economic Review, American Economic Association, vol. 95(4), pages 1300-1309, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jordi Brandts & Leonie Gerhards & Lydia Mechtenberg, 2018. "Deliberative Structures and their Impact on Voting under Economic Conflict," Working Papers 1022, Barcelona School of Economics.
    2. Silvia Dominguez Martinez & Randolph Sloof, 2016. "Communication versus (Restricted) Delegation: An Experimental Comparison," Tinbergen Institute Discussion Papers 16-050/VII, Tinbergen Institute.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jordi Brandts & David J. Cooper, 2018. "Truth Be Told An Experimental Study of Communication and Centralization," Working Papers 1046, Barcelona School of Economics.
    2. Jordi Brandts & David J. Cooper, 2020. "Managerial Leadership, Truth-Telling, and Efficient Coordination," Working Papers 1211, Barcelona School of Economics.
    3. Rudiger, Jesper, 2013. "Using Other People's Opinions: An Experimental Study," MPRA Paper 51787, University Library of Munich, Germany.
    4. Luis Garicano & Luis Rayo, 2016. "Why Organizations Fail: Models and Cases," Journal of Economic Literature, American Economic Association, vol. 54(1), pages 137-192, March.
    5. López-Pérez, Raúl & Pintér, Ágnes & Kiss, Hubert J., 2015. "Does payoff equity facilitate coordination? A test of Schelling's conjecture," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 209-222.
    6. Kriss, Peter H. & Blume, Andreas & Weber, Roberto A., 2016. "Coordination with decentralized costly communication," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 225-241.
    7. Stefano Demichelis & Jorgen W. Weibull, 2008. "Language, Meaning, and Games: A Model of Communication, Coordination, and Evolution," American Economic Review, American Economic Association, vol. 98(4), pages 1292-1311, September.
    8. Jordi Brandts & David J. Cooper & Enrique Fatas & Shi Qi, 2016. "Stand by Me—Experiments on Help and Commitment in Coordination Games," Management Science, INFORMS, vol. 62(10), pages 2916-2936, October.
    9. Robert Gibbons, 2010. "Transaction‐Cost Economics: Past, Present, and Future?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(2), pages 263-288, June.
    10. Francisca Jiménez-Jiménez & Javier Rodero Cosano, 2021. "Experimental cheap talk games: strategic complementarity and coordination," Theory and Decision, Springer, vol. 91(2), pages 235-263, September.
    11. Edward Cartwright & Joris Gillet & Mark Van Vugt, 2013. "Leadership By Example In The Weak-Link Game," Economic Inquiry, Western Economic Association International, vol. 51(4), pages 2028-2043, October.
    12. Christoph Feldhaus & Julia Stauf, 2016. "More than words: the effects of cheap talk in a volunteer’s dilemma," Experimental Economics, Springer;Economic Science Association, vol. 19(2), pages 342-359, June.
    13. Feltovich, Nick & Grossman, Philip J., 2015. "How does the effect of pre-play suggestions vary with group size? Experimental evidence from a threshold public-good game," European Economic Review, Elsevier, vol. 79(C), pages 263-280.
    14. Cooper David J, 2006. "Are Experienced Managers Experts at Overcoming Coordination Failure?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(2), pages 1-52, May.
    15. Tjaša Bjedov & Thierry Madiès & Marie Claire Villeval, 2016. "Communication And Coordination In A Two-Stage Game," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1519-1540, July.
    16. Siyu Wang & Timothy Flannery, 2021. "Intention or Request: The Impact of Message Structures," Games, MDPI, vol. 12(1), pages 1-13, February.
    17. Dufwenberg, Martin & Servátka, Maroš & Vadovič, Radovan, 2017. "Honesty and informal agreements," Games and Economic Behavior, Elsevier, vol. 102(C), pages 269-285.
    18. Erin L. Krupka & Stephen Leider & Ming Jiang, 2017. "A Meeting of the Minds: Informal Agreements and Social Norms," Management Science, INFORMS, vol. 63(6), pages 1708-1729, June.
    19. Hu, Youxin & Kagel, John & Yang, Huanxing & Zhang, Lan, 2020. "The effects of pre-play communication in a coordination game with incomplete information," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 403-415.
    20. Yoshio Kamijo & Hiroki Ozono & Kazumi Shimizu, 2016. "Overcoming coordination failure using a mechanism based on gradualism and endogeneity," Experimental Economics, Springer;Economic Science Association, vol. 19(1), pages 202-217, March.

    More about this item

    Keywords

    Coordination; experiments; Organizations; asymmetric Information;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bge:wpaper:854. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bruno Guallar (email available below). General contact details of provider: https://edirc.repec.org/data/bargses.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.