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The Limits of Authority: Motivation versus Coordination

  • Van den Steen, Eric

This paper studies the effects of open disagreement on motivation and coordination. It shows how - in the presence of differing priors - motivation and coordination impose conflicting demands on the allocation of authority, leading to a trade-off between the two. The paper first derives a new mechanism for delegation: since the agent thinks - by revealed preference applied to differing priors - that his own decisions are better than those of the principal, delegation will motivate him to exert more effort when effort and correct decisions are complements. A need for implementation effort will thus lead to more decentralization. The opposite holds for substitutes. Delegation, however, reduces coordination when people disagree on the right course of action. The paper shows that - with differing priors - the firm needs to rely more on authority (as opposed to incentives) to solve coordination problems, relative to the case with private benefits. An interesting side-result here is that the principal will actively enforce her decisions only at intermediate levels of the need for coordination. The combination of the two main results implies a trade-off between motivation and coordination, both on a firm level and across firms. I derive the motivation-coordination possibility frontier and show the equilibrium distribution of effort versus coordination. I finally argue that strong culture, in the sense of homogeneity, is one (costly) way to relax the trade-off.

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File URL: http://hdl.handle.net/1721.1/37305
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Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 37305.

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Date of creation: 27 Apr 2007
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Handle: RePEc:mit:sloanp:37305
Contact details of provider: Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
Phone: 617-253-2659
Web page: http://mitsloan.mit.edu/

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Order Information: Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

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  1. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  2. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  3. Augustin Landier & David Sraer & David Thesmar, 2009. "Optimal Dissent in Organizations," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 761-794.
  4. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, vol. 91(2), pages 200-205, May.
  5. Friebel, Guido & Raith, Michael, 2006. "Resource Allocation and Firm Scope," CEPR Discussion Papers 5763, C.E.P.R. Discussion Papers.
  6. repec:bla:restud:v:76:y:2009:i:2:p:761-794 is not listed on IDEAS
  7. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
  8. Arnoud W. A. Boot & Radhakrishnan Gopalan & Anjan V. Thakor, 2006. "The Entrepreneur's Choice between Private and Public Ownership," Journal of Finance, American Finance Association, vol. 61(2), pages 803-836, 04.
  9. Muhamet Yildiz, 2003. "Bargaining without a Common Prior-An Immediate Agreement Theorem," Econometrica, Econometric Society, vol. 71(3), pages 793-811, 05.
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  1. Industrial Sociology (FCT-UNL)

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