Coordination through Authority vs Consensus

One of the deÞning characteristics of organizations is the presence of a managerial hierarchy which coordinates economic activity by use of authority. Organizations, however, also frequently delegate decisions to groups of agents committees, cross-functional teams as opposed to managers. This paper proposes a model of organizational decision-making with endogenous communication costs and puts forward a theory of why and when authority is a superior coordination device relative to some form of consensus (that is, majority rule or unanimity). We argue that coordination by authority results in faster decision-making and a less distorted aggregation of information. This, however, comes at the expense of a narrowness in decision-making, where the agent in control is biased in favor of her own ideas. Authoritative coordination tends to be indicated for problems which are urgent or complex, or where the variance in the quality of potential solutions is limited. The magnitude of the incentive conßict among agents has a non-monotonic impact on the trade-off between authority and consensus, with the latter being optimal for small and large conßicts of interest. We Þnally show how imposing a unanimity rule as opposed to a majority rule can alleviate some of the drawbacks of consensus. ∗University of Chicago, Graduate School of Business and CEPR. I have beneÞted from discussions with Luis Garicano and Tano Santos, and comments from Canice Prendergast and Eric Van den Steen on a preliminary draft. Email: [email protected].