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The optimal design of fallible organizations: invariance of optimal decision criterion and uniqueness of hierarchy and polyarchy structures

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  • Winston Koh

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Abstract

We present a general framework to study the project selection problem in an organization of fallible decision-makers. We show that when the organizational size and the majority rule for project acceptance are optimized simultaneously, the optimal quality of decision-making, as determined by the decision criterion, is invariant, and depends only on the expertise of decision-makers. This result clarifies that the circumstances under which the decision-making quality varies with the organizational structure are situations where the organizational size or majority rule is restricted from reaching the optimal level. Moreover, in contrast to earlier findings in the literature that the hierarchy and the polyarchy are suboptimal structures, we show that when the size, structure and decision criterion are simultaneously optimized, the hierarchy and the polyarchy are in fact the only possible optimal organizational structures when decision-making costs are present.

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Bibliographic Info

Article provided by Springer in its journal Social Choice and Welfare.

Volume (Year): 25 (2005)
Issue (Month): 1 (October)
Pages: 207-220

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Handle: RePEc:spr:sochwe:v:25:y:2005:i:1:p:207-220

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  1. Ben-Yashar, Ruth & Nitzan, Shmuel, 1998. "Quality and structure of organizational decision-making," Journal of Economic Behavior & Organization, Elsevier, vol. 36(4), pages 521-534, September.
  2. Ruth Ben-Yashar & Jacob Paroush, 2001. "Optimal decision rules for fixed-size committees in polychotomous choice situations," Social Choice and Welfare, Springer, Springer, vol. 18(4), pages 737-746.
  3. Raaj Kumar Sah, 1991. "Fallibility in Human Organizations and Political Systems," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 67-88, Spring.
  4. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  5. Nicola Persico, 2004. "Committee Design with Endogenous Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(1), pages 165-191, 01.
  6. Koh, Winston T. H., 1994. "Making decisions in committees a human fallibility approach," Journal of Economic Behavior & Organization, Elsevier, vol. 23(2), pages 195-214, March.
  7. Raaj Kumar Sah & Joseph E. Stiglitz, 1984. "The Architecture of Economic Systems: Hierarchies and Polyarchies," NBER Working Papers 1334, National Bureau of Economic Research, Inc.
  8. Sah, Raaj Kumar & Stiglitz, Joseph E, 1988. "Committees, Hierarchies and Polyarchies," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 98(391), pages 451-70, June.
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