Strategic Automation and Decision-Making Authority

Abstract

This paper studies adoption and utilization of automation within firms of different organizational structures. We develop a theoretical model of organizational design with embedded cheap-talk. Specifically, we study a firm with a principal and two divisional managers, where production tasks can be automated in each division. Our findings show that there exists heterogeneity among firms in how they utilize automation based on their organizational structure. In specific, while more centralized firms may automate divisions facing higher risk and uncertainty, more decentralized firms choose to do the opposite. Moreover, as the overall automation capacity increases, firms follow distinctly different strategies to adapt to changing market conditions. With higher automation capacity, a firm is more likely to centralize decision-making at the top, rather than having a decentralized decision-making structure. This suggests that, the structure of firms and the role of managers may change as well, altering the allocation of decision-making rights within organizations. In consequence, as firms automate more and more tasks, mid-level managers become more focused on day-to-day operations and less involved in strategic decision-making on behalf of the firm. Finally, the paper shows that automation can be a strategic substitute to monetary contracts.

Keywords: Artificial Intelligence, Automation, Decision Making, Organizational Hierarchy