Organizing for Change: Preference diversity, effort incentives, and separation of decision and execution

Author Name ITOH Hideshi  (Faculty Fellow, RIETI)
Creation Date/NO. July 2015 15-E-082
Research Project Innovation, Incentives, and Organizations
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We study the decision process of an organization that faces a problem of choosing between the status quo project ("no change") and the new project ("change"). The organization consists of a decision maker and an implementer. The implementer first chooses a costly effort to develop a new project. If it is developed, the decision maker formally selects either the status quo project or the new project. Otherwise, only the status quo project is available (and is selected). The implementer then chooses an implementation effort to execute the selected project. Both the decision maker and the implementer have intrinsic and possibly divergent preferences over two projects that are either status-quo-biased (anti-changer) or change-biased (pro-changer). The owner of the organization must choose one of four feasible organizational forms: both status-quo-biased, both change-biased, a status-quo-biased decision maker and a change-biased implementer, and a change-biased decision maker and a status-quo-biased implementer. We analyze how the organizational form affects the decision maker's project selection, the implementer's implementation motive, and his incentive to develop a new project, and solves for the organization optimal for the unbiased owner.