The Pivotal Mechanism and Organizational Control

Abstract:     
Organizations with multiple individuals typically make decisions by following the will of the majority of some subset of stakeholders that are entitled to vote. This paper examines an alternative decision-making mechanism-the "pivotal" mechanism developed by Groves and Clarke. Unlike voting, the pivotal mechanism produces efficient outcomes in the presence of heterogeneous voter preferences. Moreover, the mechanism allows control rights to be allocated more widely, reducing the costs of opportunism when a controlling class of stakeholders has interests adverse to another class. These benefits come with costs. The pivotal mechanism's efficiency diminishes in the presence of collusion between voters and requires the creation of "pools" that disperse revenues created by the mechanism. The mechanism is therefore most attractive when the costs of heterogeneity are large and the risks of collusion are small. As a result, I propose the development of a legal basis for the pivotal mechanism as a menu option for organizational decision making.

Keywords: corporate governance, voting, corporations, heterogeneity

Working Paper Series