Economics of Committees

Abstract

An objective of this paper is to analyze the economic performance of committees; in particular, the optimal degree of consensus to be required for committee’s decision making (concerning acceptance or rejection of projects), and the optimal size of committee. Our focus is two basic trade-offs in organizational decision making: between the (Type I) errors of rejecting good projects and the (Type II) errors of accepting bad projects; and between gains from a more extensive evaluation of projects and the resources spent on evaluation. We provide a general characterization of the optimum, and we use this characterization to derive a number of qualitative results. For instance, if the two types of individuals’ errors of judgment are equal, then the marginal majority rule is optimal (that is, for an increment in the committee size by 2, the optimal consensus increases by 1). If, in addition, the losses from the two types of errors are equal, then the majority rule is optimal.

The paper also analyzes hierarchies, polyarchies, and more complex forms of organization; and derives, for instance, simple interpretations of the optimal number of levels within a hierarchy, and units within a polyarchy. Among other questions which we address are, whether perfection in organizational decision making is feasible, and whether it is economically desirable.