Participatory Management within a Theory of the Firm

Abstract

American industrial enterprises long were organized as rigid hierarchies in which production-level employees had little discretion or decision making authority. Recently, however, many firms have adopted participatory management programs purporting to give workers a substantially greater degree of input into corporate decisions. Despite the democratic rhetoric of employee involvement, participatory management in fact has done little to disturb the basic hierarchical structure of large corporations. Instead, it is simply an adaptive response to three significant problems created by the tendency in large firms towards excessive levels of hierarchy. First, large branching hierarchies themselves create informational inefficiencies. Second, informational asymmetries persist even under efficient hierarchical structures. Finally, excessive hierarchy impedes effective monitoring of employees. Participatory management facilitates the flow of information from the production level to senior management by creating a mechanism for by-passing mid-level managers, while also bringing to bear a variety of new pressures designed to deter shirking. On its face, this account implies no affirmative public policy beyond appropriate enabling rules. Yet, many academics and government leaders nevertheless propose mandating some form of participatory management. Drawing on several strands of economic analysis, including game theory and public choice, this paper concludes that such proposals are unwarranted.

JEL Classification: J53, K31