Strategic Automation and Decision-Making Authority

44 Pages Posted: 28 Sep 2018

See all articles by Mustafa Dogan

Mustafa Dogan

Carnegie Mellon University

Alexandre Jacquillat

Carnegie Mellon University

Pinar Yildirim

University of Pennsylvania - The Wharton School

Date Written: September 7, 2018

Abstract

In this paper, we investigate how automation alters decision-making responsibilities of mid- and upper-level managers within organizations. We develop a theoretical model of a firm with three organizational layers and two divisions. The firm is managed by an executive (principal); divisions are led by mid-level managers; and production tasks are performed by workers, or alternatively, are automated. There are two frictions between the firm’s middle and upper management. First, there is information asymmetry: a manager holds information that is specific to his division and critical for the firm’s decision-making, but the principal does not have access to this information. Second, the objectives of the principal and the manager are only partially aligned: while the principal cares about maximizing the total firm profit, the manager cares about his division more than the other division.

In this environment, through an extensive-form game with embedded cheap talk, we show that the princi- pal automates tasks strategically to manage intra-firm frictions and protect divisions from negative produc- tivity shocks. With higher levels of automation, the principal becomes more likely to retain decision-making rights by choosing a “top-down” structure as opposed to a structure where she “delegates” decision-making authority to a manager. Therefore, automation increases centralization of decision-making power at the upper level of organizations. As a consequence, as firms automate tasks, mid-level managers become more focused on day-to-day operations and less involved in strategic decision-making on behalf of the firm.

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

Suggested Citation

Dogan, Mustafa and Jacquillat, Alexandre and Yildirim, Pinar, Strategic Automation and Decision-Making Authority (September 7, 2018). Available at SSRN: https://ssrn.com/abstract=3226222 or http://dx.doi.org/10.2139/ssrn.3226222

Mustafa Dogan

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Alexandre Jacquillat (Contact Author)

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States
4122683517 (Phone)

Pinar Yildirim

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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