Despite the benefits of delegation, anecdotal and survey-based evidence suggests that firms do not optimally delegate decision-making authority. However, to date, no quantifiable evidence supports this claim.
We design an experiment to explore the superior’s choice between delegation and information elicitation. We also examine the effect of the superiors’ choice on the amount of effort provided by subordinates to gather decision-facilitating information.
We find that, compared to economic predictions, superiors delegate less often than they should. Subordinates exert lower effort when superiors elicit information than when superiors delegate the decision to them. As a result, superiors earn lower profit when they elicit information than when they delegate decision-making authority.
Our empirical evidence supports two main tenets espoused in the literature on the allocation of decision rights. First, the evidence of under delegation contributes to the literature which maintains that superiors’ tendency to under-delegate leads firms to become overly centralized.
By designing a novel experimental, we identify systematic ways in which behavior deviates from economic theory and contribute to the discussion on how firms utilize information. In particular, under delegation prevents firms from exploiting economies that arise from local capabilities and task specialization, and results in forgone profits.
This paper has benefited from helpful insights from Sean Pfeffer, Doug Stevens, Jeremy Lill, Michael Mjerczyk, Ivo Tafkov, Flora Zhou, Stephan Kramer, Nadine Funcke, Paolo Perego, Marcel van Rinsum, and workshop participants at The University of Kentucky, Erasmus University, Georgia State University, and the 2013 Management Accounting Conference. We thank Colorado State University for providing funding for this study.
Coats, J.C. and Rankin, F.W. (2016), "The Delegation of Decision Rights: An Experimental Investigation", Advances in Management Accounting (Advances in Management Accounting, Vol. 27), Emerald Group Publishing Limited, Bingley, pp. 39-71. https://doi.org/10.1108/S1474-787120160000027002
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