On Authority and Delegation
On Authority and Delegation Abstract We analyze a key problem in organization theory and design, namely the potential tension between authority (i. ... We provide an integrative treatment of the tensions that are involved in the interaction between authority and discretion, and the motivational problems that may result from this tension. ... 2 An important problem in organization theory (including organizational economics) is the tension in organizations between authority ¾ that is, the power to make decisions which guide the decisions of another person in the context of incomplete contracts and uncertainty (e. ... , authority) may use this power to renege on delegation. We argue that such reneging is likely to harm employee motivation, in turn harming organizational performance; hence, the tension between authority and delegated discretion. ... In other words, the tension between authority and discretion and how (well) it is resolved helps to determine organizational form. To illustrate the relevance of the tension between authority and discretion (as well as its application to new organizational forms), consider the much cited case of organizational turnaround in Danish hearing aids producer, Oticon A/S (Peters 1992; Morsing and Eiberg 1998) in the beginning of the 1990s. ... It was almost entirely project-based and characterized by substantial delegation of decision rights. ... The organizational design formally implied little exercise of central authority; thus, the role of the central management committee was only to ratify or reject projects following strict and transparent criteria, as well as to monitor projects on a regular basis. ... He arguably did so because he perceived certain unfortunate spillover effects of the strong delegation of discretion that characterized the Oticon spaghetti 1 Much of our reasoning relates to the notion of trust. ... The Oticon case suggests that there may be substantive implications for organizational design in the distinction between authority and discretion, perhaps particularly for the design of new organizational forms. ... We begin by clarifying the notions of authority and delegated discretion, provide explanations of why they (co-)exist in firms, and argue that this implies that the notion of authority should be extended beyond the narrow one of order-giving (Coase 1937; Simon 1951), in particular to also encompass the power to delegate and constrain discretion, as well as the ability to veto subordinates’ decisions (“Authority and Discretion: Literature Review and Discussion”). Next, the interplay between authority and discretion is examined. We begin by discussing optimal delegation in a stylized framework, and then discuss the motivational problems that may arise when managers exercise authority by reneging on the delegation of discretion. This brings the factors that keep such reneging at bay into focus (“Authority and Discretion: Tensions, Credible Commitments, and Implicit Contracts”). ... Authority and Discretion: Definitions and Discussion The concept of authority is closely linked to the sociological literature on bureaucracy (e. ... Moreover, particularly the concept of authority comes with a multitude connotations, and because our discussion may only capture some of these connotations. ... In the following, we offer definitions of, and rationales for, authority and discretion. Defining Authority and Discretion Organization and behavioral theories, usually drawing on sociology and psychology, present a number of interpretations of authority (Weber 1921; Thompson 1956; Grandori 2002). It would be beyond the scope of this paper to present a full review and critical evaluation of the multitude of definitions and ideas regarding the concept of authority. For our purpose, the concepts of authority offered by Simon (1951, 1991) serves as a sufficient starting point.2 Simon (1951) defines authority as obtaining when a “boss” is permitted by a “worker” to select actions, A0 Ì A, where A is the set of the worker’s possible behaviors. More or less authority is then simply defined as making the set A0 larger or smaller. ... ” An important feature of authority thus is that the authority of a superior is constrained by the acceptance of the subordinate of the authority. A limitation of Simon’s (1951) conceptualization of authority is that it is assumes that the employer has all the relevant information, the worker being merely a passive instrument who reacts to instructions based on this information. Such a notion is at odds with the exercise of authority in modern knowledge-based production, where employees are hired exactly because they, in some certain respects, possess knowledge that is superior to that of the employer. However, as Simon (1991: 31) himself pointed out four decades after his initial paper on authority, “[a]uthority in organizations is not used exclusively, or even mainly, to command specific actions.” Rather, it is a command that takes the form of a result to be produced, a principle to be applied, or goal constraints, so that “[o]nly the end goal has been supplied by the 2 The first organizational economics explanation of the existence of the authority relation is due to Coase (1937): In the presence of uncertainty, contingencies are costly to anticipate and describe in advance, and rather than negotiating over each contingency as they materialize and on a spot market basis, an employment contract is concluded. ... These two contributions still define how economists think about authority. ... , Hart 1995; Williamson 1996) mostly elaborate on the sources of authority in terms of ownership or the law. ... Now, in Simon (1951) (as well as Coase 1937), the only restrictions in the employment contract are those that are placed on the use of authority by the employer (i. ... This suggests a second important function for authority, namely to delegate and constrain discretion. ... While the aim of this paper is to examine the interaction between authority and discretion, we need to first discuss why authority and discretion exist in firms. We concentrate on spelling out the costs and benefits of discretion, because our (expanded) notion of authority centers on maximizing the net benefits of discretion through the setting of constraints (including the setting of goals and vetoing subordinates’ decisions). ... However, some tasks may inherently require the participation of more than one person, which necessitates some delegation of discretion. Also, delegation may be chosen for reasons of economizing with managers’ time (i. ... According to the argument from learning, delegating discretion to employees will not only lead to a better use of the knowledge that they already control, but also to the discovery of new knowledge that they would not discover in the absence of delegation (Miles et al. ... In particular, much of the discussion of Total Quality Management has stressed that delegation of rights to TQM teams leads to improved problem-solving efforts, that is, to a more efficient process of discovery of solutions to technical and marketing related problems (e. ... Finally, the argument from intrinsic motivation stresses that increasing the delegation of discretion to employees likely “… raises the perceived self-determination of employees and 3 Delegation is arguably also undertaken because it eases the provision of high-powered incentives. However, delegation aiming at strengthening incentives requires that the organization is decomposable into rather modular 7 therewith strengthens intrinsic motivation” (Osterloh and Frey 2000: 543), leading to an increase in creativity in the pursuit of goals. ... Note that none of the above arguments consider the trade-offs involved in delegation of discretion. ... , Osterloh and Frey 2000; Child and McGrath 2001), as well as the literature on empowerment (Conger and Kanungo 1988; Thomas and Velthouse 1990) tend to emphasize the benefit, rather than the cost, side of delegation (but see Vroom and Jago 1988 for an exception). However, writers within the agency literature address the issue of optimum delegation (Jensen and Meckling 1992; Armstrong 1994; Gal-Or and Amit 1998). In general, they conclude that delegation creates opportunities for employees to collect informational rents and/or engage in morally hazardous activities. Roughly, optimum delegation obtains when the incremental gain from making use of expert knowledge equals the incremental costs from loss of control. ... Thus, the agency approach abstracts from costs of delegation of discretion that are not the result of moral hazard, but which may still arise in systems of interdependent decision-making. ... Among the costs of delegation in complex firms are the following ones: Common goods problems. ... First-come/first-served and other mechanisms arise to allocate the services of the assets in the presence of delegation of use rights. However, such mechanisms may be inefficient compared to allocation by means of authority. ... Thus, it is decomposability rather than delegation that paves the way for the use of high-powered incentives. ... While these problems may be handled through, for example, communication, such mechanisms may be less efficient than authority. ... The Interaction Between Authority and Discretion In much of the literature, there has been a tendency to discuss the issues of authority and discretion separately.4 However, this is problematic because the interaction between authority and discretion gives rise to distinct organizational problems. ... On the other hand, managers acting in the (possibly justified) belief that they possess superior knowledge about the nature of the interdependencies in the organization exercise authority in order to improve coordination. However, this may clash with one of the main supposed benefits of delegation, namely the improvement of motivation. This is the fundamental tension between authority and discretion. ... Authority and Discretion: Tensions, Credible Commitments, and Implicit Contracts In this section we begin by illustrating by means of a simple graphical framework a basic tradeoff that arises in the allocation of discretion. We then examine reasons why managers may intervene and overrule decisions made on the basis of delegated discretion, and how this 4 The economics of organization offer explanations of both authority and discretion. However, these are forwarded separately, and the interaction between authority and discretion is seldom inquired into. ... Agency theory may seem to allow for this interaction, but can only treat authority in the very narrow sense of monitoring, which is clearly an aspect of the exercise of authority (e. ... Delegation only encompasses delegation of discretion, not of authority. We make this simplifying assumption in order to highlight the interaction between authority and discretion, and avoid complicating issues of delegation of authority, which do not seem to add extra content to the analysis. ... These assumptions may be strong ones; however, they are necessary for keeping the discussion simple and allow us to highlight the interaction between authority and discretion. ... The B-curve shows the benefits from increasing delegation. ... , augmenting their human capital) as delegation increases. ... The curve is assumed to be convex, because as delegation increases, decision rights will increasingly overlap across tasks and functions, leading to the costs of delegation of discretion increasing at an increasing rate. ... Given the B and C curves, the optimum degree of delegation is given by D1*. ... There are four overall reasons why the degree of delegation preferred and implemented by management may deviate from D1*, that is, the one that maximizes the organization’s performance. First, management may decide that the degree of delegation should change as a response to changing outside contingencies. Second, management may change its perceptions of the firm’s overall strategy and the internal resource allocation (including the degree of delegation) that may support this strategy. Third, management may realize private benefits from deviating from the degree of delegation that is optimal for the firm. ... We assume that the firm is initially in equilibrium with respect to the degree of delegation. Changing contingencies upset this equilibrium, because it introduces new kinds of interdependencies in decision-making, thus requiring adaptation in terms of the delegation of discretion. ... Such new technologies typically require new interface standards, which may require the delegation of more discretion to designers and engineers in order to stimulate exploration through wide bandwidth 5 “Manager” may be substituted with “corporate headquarters,” “CEO,” etc.