Timing Decisions in Organizations: Communication and Authority in a Dynamic Environment

Abstract

We consider a problem where an uninformed principal makes a timing decision interacting with an informed but biased agent. Because time is irreversible, the direction of the bias crucially affectsMany decisions in organizations deal with the optimal timing of taking a certain action. Because information in organizations is dispersed, the decision maker needs to rely on the information of her better-informed subordinates who, however, may have conflicting preferences. Consider the following two examples of such settings: (i) in a typical hierarchical firm, top executives may be less informed than the product manager about the optimal timing of the launch of a new product. It would not be surprising for an empire-building product manager to be biased in favor of an earlier launch; (ii) the CEO of a multinational corporation is contemplating when to shut down a plant in a struggling economic region. While the local plant manager is better informed about the prospects of the plant, he may be biased toward a later shutdown due to personal costs of relocation.These examples share a common theme. An uninformed principal faces an optimal stopping-time problem-when to exercise a real option. An agent is better informed than the principal but is biased toward earlier or later exercise. In this paper, we study how organizations make timing decisions in such a setting. We examine the * Grenadier: Graduate School of Business, Stanford University, 655 Knight Way, Stanford, CA 94305 (e-mail: sgren@stanford.edu); Malenko: MIT Sloan School of Management, 100 Main Street, E62-619, Cambridge, MA 02142 (e-mail: amalenko@mit.edu); Malenko: Carroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467 (e-mail: nadya.malenko@bc.edu). We are grateful to three anonymous referees,