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Organizational Structure as the Channeling of Boundedly Rational Pre-play Communication

  • Ellingsen, Tore

    ()

    (Dept. of Economics, Stockholm School of Economics)

  • Östling, Robert

    ()

    (Dept. of Economics, Stockholm School of Economics)

We model organizational decision making as costless pre-play communication. Decision making is called authoritarian if only one player is allowed to speak and consensual if all players are allowed to speak. Players are assumed to have limited cognitive capacity and we characterize their behavior under each decision making regime for two different cognitive hierarchy models. Our results suggest that authoritarian decision making is optimal when players have conflicting preferences over the set of Nash equilibrium outcomes, whereas consensual decision making is optimal when players have congruent preferences over this set. The intuition is that authoritarian decision making avoids conflict, but sometimes creates insufficient mutual trust to implement socially optimal outcomes.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 634.

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Length: 35 pages
Date of creation: 25 Sep 2006
Date of revision:
Handle: RePEc:hhs:hastef:0634
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