This paper studies delegation as an alternative to communication. We show that a principal prefers to delegate control to a better informed agent rather than to communicate with this agent as long as the incentive conflict is not too large relative to the principal's uncertainty about the environment. We further identify cases in which the principal optimally delegates control to an “intermediary”, and show that keeping a veto-right typically reduces the expected utility of the principal unless the incentive conflict is extreme. Copyright 2002, Wiley-Blackwell.

ABSTRACT This paper develops a theory of control as a signal of congruence of objectives, and applies it to financial contracting between an investor and a privately informed entrepreneur. We show that formal investor control is (i) increasing in the information asymmetries ex ante, (ii) increasing in the uncertainty surrounding the venture ex post, (iii) decreasing in the entrepreneur's resources, and (iv) increasing in the entrepreneur's incentive conflict. In contrast, real investor control—that is, actual investor interference—is decreasing in information asymmetries. Control rights are further such that control shifts to the investor in bad states of nature.

We consider organizations that optimally choose the level of adaptation to a changing environment when coordination among specialized tasks is a concern. Adaptive organizations provide employees with flexibility to tailor their tasks to local information. Coordination is maintained by limiting specialization and improving communication. Alternatively, by letting employees stick to some preagreed action plan, organizations can ensure coordination without communication, regardless of the extent of specialization. Among other things, our theory shows how extensive specialization results in organizations that ignore local knowledge, and it explains why improvements in communication technology may reduce specialization by pushing organizations to become more adaptive.

We argue that economists have studied the role of management from three perspectives: contingency theory (CT), an organization-centric empirical approach (OC), and a leader-centric empirical approach (LC). To reconcile these three perspectives, we augment a standard dynamic firm model with organizational capital, an intangible, slow-moving, productive asset that can be produced only with the direct input of the firm’s leadership and that is subject to an agency problem. We characterize the steady state of an economy with imperfect governance and show that it rationalizes key findings of CT, OC, and LC as well as generates a number of new predictions on performance, management practices, chief executive officer behavior and compensation, and governance.

Many US colleges now use test-optional admissions. A frequent claim is that by not seeing standardized test scores, a college can admit a student body it prefers, say, with more diversity. But how can observing less information improve decisions? This paper proposes that test-optional policies are a response to social pressure on admission decisions. We model a college that bears disutility when it makes admission decisions that “society” dislikes. Going test optional allows the college to reduce its “disagreement cost.” We analyze how missing scores are imputed and the consequences for the college, students, and society. (JEL I23, I28)

This paper studies optimal communication flows in organizations. A production process can be coordinated ex ante, by letting agents stick to a prespecified plan of action. Alternatively, agents may adapt to task-specific shocks, in which case tasks must be coordinated ex post, using communication. When attention is scarce, an optimal organization coordinates only a few tasks ex post. Those tasks are higher performing, more adaptive to the environment, and influential. Hence, scarce attention requires setting priorities, not just local optimization. Our results provide microfoundations for a central idea in the management literature that firms should focus on a limited set of core competencies. (JEL D23, D83, D85, L23, M11, M54)

This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multidivisional organization in which decisions must be adapted to local conditions but also coordinated with each other. Information about local conditions is dispersed and held by self-interested division managers who communicate via cheap talk. The only available formal mechanism is the allocation of decision rights. We show that a higher need for coordination improves horizontal communication but worsens vertical communication. As a result, decentralization can dominate centralization even when coordination is extremely important relative to adaptation. (JEL D23, D83, L23, M11)

An agent advises a principal on selecting one of multiple projects or an outside option. The agent is privately informed about the projects' benefits and shares the principal's preferences except for not internalizing her value from the outside option. We show that for moderate outside option values, strategic communication is characterized by pandering: the agent biases his recommendation toward “conditionally better-looking” projects, even when both parties would be better off with some other project. A project that has lower expected value can be conditionally better-looking. We develop comparative statics and implications of pandering. Pandering is also induced by an optimal mechanism without transfers. (JEL D23, D82)