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,

Investment under uncertainty with financial constraints

“…In strategic dynamic contexts, Grenadier and Malenko (2011) study games in which the decision to exercise an option is a signal of private information to outsiders. Grenadier, Malenko, and Malenko (2016) consider a problem where an uninformed principal makes a timing decision interacting with an informed but biased agent.…”

Peer Pressure: Social Interaction and the Disposition Effect

“…Studies of fund managers (Lakonishok et al 1991) and loan officers (Hertzberg, Liberti, and Paravisini 2010) argue for the importance of impression-management strategies when it comes time to disclose financial performance to clients, while others model the strategic timing of communication (Grenadier, Malenko, and Malenko 2015). However, similar concepts have not yet been applied to our understanding of household investors, even though evidence suggests external impressions, such as beauty (Duarte, Siegel, and Young 2012;Ravina 2012), matter in financial contexts.…”

Ambiguity aversion in buyer-seller relationships: A contingent-claims and social network explanation

“…Our modelling builds on a rich and still growing stream of research on real options under incomplete information (e.g. Nishihara and Shibata, 2008;Shibata and Nishihara, 2011;Feng et al, 2014;Grenadier et al, 2016). We add to these studies by accounting for ambiguity and each party's private information about their own ambiguity aversion parameter i ρ (and option value parameter b ) in the negotiation.…”

“…information about the uncertainty variables is generally symmetric (see also Grenadier, 2005;Nishihara and Shibata, 2008;Shibata and Nishihara, 2011;Feng et al, 2014;Grenadier et al, 2016). We consider this information to remain private in our setting and design incentives and signalling mechanisms for the buyer (seller) to elicit the true level of ambiguity aversion of his (or her) counterpart in the presence of information asymmetry.…”