Organizational Decision Making: An Information Aggregation View

Abstract

We study four information aggregation structures commonly used by organizations to evaluate opportunities: individual decision making, delegation to experts, majority voting, and averaging of opinions. Using a formal mathematical model, we investigate how the performance of each of these structures is contingent upon the breadth of knowledge within the firm and changes in the environment. Our model builds on work done in the Carnegie tradition and in the group and behavioral decision making literatures. We use the model to explore when delegation is preferable to other structures, such as voting and averaging. Our model shows that delegation is the most effective structure when there is diversity of expertise, when accurate delegation is possible, and when there is a good fit between the firm's knowledge and the knowledge required by the environment. Otherwise, depending on the knowledge breadth of the firm, voting or averaging may be the most effective structure. Finally, we use our model to shed light on which structures are more robust to radical environmental change and when crowd-based decision-making may outperform delegation.

Keywords: organizational structure, decision making, knowledge, environmental change, microfoundations of strategy

JEL Classification: D81, D23, D71, D73