This award funds research that tests economic theories about how leadership can work to reduce coordination failures. Coordination failure is a common problem affecting many organizations. For example, a single individual's weak effort can drag down the performance of an entire group. An assembly line moves no faster than the slowest person in the line or a report doesn?t get finished until the last person completes their section. Organizations with a potential 'weak link' are prone to being caught in productivity traps where all individuals exert low effort. Leadership is a natural tool for managing and facilitating the process of transitioning to a better outcome.
The PIs and their collaborators have a long standing interest in the relationship between coordination and leadership. Previous research demonstrates that able leaders can increase the odds of successful coordination, but imposing a leader is not a cure-all. The odds of success depend on who the leader is, how they are selected, the tools they have available, and how they exercise their leadership. We propose three projects which look at new environments in which coordination and leadership are important and examine previously untested mechanisms for making leaders more effective.
(1) Centralized vs. Decentralized Management: Consider a firm with two divisions. The divisions can gain by coordinating their activities but each division has private information about the state of the world and, critically, the interests of the two divisions are not perfectly aligned. Is it better to have a central manager collect information from the divisions and impose choices on the divisions or to have the divisions share information and make decisions separately? Centralized management largely eliminates the coordination problem facing the divisions, but gives the divisions incentives to distort their reports to the central manager, leading to suboptimal outcomes. Alonso, Dessein, and Matouschek (2008) show that decentralization maximizes firm profits under broad conditions, but this result relies on behavioral assumptions that may be unrealistic. This award funds experiments that simplify the environment of Alonso et al, stacking the deck against centralization by eliminating information asymmetries between the divisions. The PIs conjecture that even in an environment biased against centralization, and contrary to theory, companies that use centralized management will outperform firms with a decentralized approach.
(2) Leadership and Advice: Imagine a group of investors independently choosing whether to put their money into an investment opportunity. The return of the investment depends on the number of investors and an unknown state of the world. The investors receive advice from an adviser who knows the state of the world, but has incentives to suggest investment when it is not in the investors' best interest. Repeated interaction forces the adviser to reconcile short term gains from deceiving investors with a long-term concern for maintaining credibility. The PIs conduct experiments to study whether advisers can successfully use their superior information to generate coordination on an efficient equilibrium. They plan to relate the results of this experiment with some of the problems facing economic policy makers as they try to lift a country out of a recession like the one currently affecting the U.S.
(3) Learning to Lead: Leaders can help groups overcome coordination failure. Nonetheless many groups with leaders fail to coordinate on an efficient outcome. This occurs not just because of bad luck, but also because leaders make systematic errors. Because specific errors can be identified, it seems plausible that bad leaders can be transformed into good ones if they can learn (or can be taught) to avoid these errors. The third project uses economic experiments to examine possible ways of improving leaders' performance: direct experience, indirect experience, and several different varieties of advice.
Intellectual Merit: Understanding how leaders function in a variety of settings is central to improving our knowledge of how organizations can achieve efficient coordination. Beyond an expansion our knowledge of leadership, the research presented here is intend to improve the design of institutions and the training of leaders to make it less likely that a productivity trap will persist.
Expected Broader Impact: Coordination problems play an important role in many economic failures. Put simply, the economy can be a self-fulfilling prophecy. If people believe the economy is going to do poorly, it will. The work proposed here is intended to help develop institutions and strategies for leaders that will make it easier to escape from productivity traps. Software and techniques developed with the proposed research should be useful in teaching a wide variety of economics and business courses. Research assistants will receive valuable training.