Premium
The Effect of Organizational form on Information Flow and Decision Quality: Informational Cascades in Group Decision Making
Author(s) -
Slezak Steve L.,
Khanveen
Publication year - 2000
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.2000.00115.x
Subject(s) - hierarchy , incentive , quality (philosophy) , information flow , disadvantage , microeconomics , business , shareholder , process (computing) , information cascade , risk analysis (engineering) , computer science , economics , psychology , finance , corporate governance , social psychology , artificial intelligence , philosophy , linguistics , epistemology , market economy , operating system
This paper identifies a disadvantage to decision making in a team. We show that in some cases available information is lost due to sequential communication that results in informational cascades. Although incentive contracts exist that prevent cascades, in some cases these contracts do not maximize shareholders' expected residual value and cascades are tolerated in equilibrium. Cascades never occur in hierarchies that exogenously prevent communication. However, when the firm is organized as a hierarchy (and the agents are given the optimal hierarchical contract), in some cases agents will collude and sequentially communicate, admitting the possibility of cascades. In these cases, the principals must monitor and enforce the hierarchical process. When monitoring costs exceed the cost of cascades, the team is the optimal organizational form.