Organizational Design and Error Propagation: Theory and Experiment

This paper explores the impact of incentives on employee performance in chain-type organizations, where workers’ efforts are interdependent on each other while the goals of all workers are aligned. Using a novel information chain game, we examine the role of incentive schemes and the procurement of costly additional information in promoting individual efforts that align with organizational goals. Our results indicate that incentivizing workers based on their own performance, and allowing them to verify information at low costs, leads to the best outcomes in chain-type organizations. This way, the firm’s profit and agents’ incomes can all be improved compared to incentivization based on the organizational goal. Additionally, we find that there is no close correlation between an individual’s own effort level and their elicited beliefs about the accuracy of the input coming from upstream agents. Our study provides valuable insights into the design of effective incentive schemes and error prevention strategies in chain-type organizations..