Disagreement and the Allocation of Control
26 Pages Posted: 20 Jun 2006
Date Written: June 2006
I study how to allocate control (over one or multiple projects) when people may openly disagree on the optimal course of action.
I first show that, in the efficient allocation, complementary decisions should be decided by the same person, while substitute decisions should be decided by different people. Furthermore, people who are confident about the right course of action and have a large stake in the outcome should get more control, while no decision should be left to chance.
The model then derives an intuitive self-reinforcing mechanism for the co-location of income and control: as a person gets more control rights, she values (by revealed preference) income rights higher, so that it is optimal to give her more income rights; as a person gets more income rights, she values control rights higher, making it optimal to give her more control rights. Different projects, however, should often be allocated to different people. While appealing, I show that these intuitions do not hold in an analogous model with private benefits but common priors. First, all players then value residual income identically. Second, an increase in a player's share of residual income may make him value control less, since the decisions necessary to maximize residual income may conflict with his private benefits.
I also study a competitive allocation of control and show that while the efficient and competitive allocation coincide in the differing priors model, they often do not in the analogous private benefits model. I finally suggest how the framework can be used to explore the role of veto-rights or majority voting.
Keywords: control, authority, complements, differing priors, heterogeneous priors
JEL Classification: D7, D8, L2, M1
Suggested Citation: Suggested Citation