Who versus when: Designing decision processes in organizations

Abstract

This paper analyzes concurrent versus sequential decision-making in a model where two units first communicate and then make decisions, attempting to both adapt to their local conditions and coordinate with their partner. Sequential decision-making improves overall information sharing compared to concurrent decision-making. However, first movers also have an incentive to over-adapt to their state, knowing second movers will conform to their decision. A surplus-maximizing headquarters prefers sequential decision-making to concurrent if and only if (i) the two units' local conditions have sufficiently different volatilities and (ii) their need to coordinate is sufficiently asymmetric or low. Finally, sequential decision-making is shown to be optimal even when allowing for additional governance structures involving the reallocation of decision rights across the units and the headquarters and is shown to render some commonly-analyzed forms of decentralization sub-optimal.