Chapter 12: Decision Rights: The Level of Empowerment

Brickley, Smith, and Zimmerman, Managerial Economics and

Organizational Architecture, 4th ed.

Decision Rights-empowermentlearning objectives

• Define and apply the concept of decision authority

• State and provide examples of costs and benefits of decentralized decision making

• State and provide examples of costs and benefits of team decision making

Assigning tasks and decision rights

• Production process involves tasks bundled into jobs

• Job dimensions– variety of tasks

• few or many

– decision authority• limited or broad

Dimensions of job design

Centralization versus decentralizationbenefits of decentralization

• Effective use of local knowledge– local tastes and preferences– price sensitivities of particular customers

• Conservation of management time– senior management focus on strategy

• Training and motivation for local managers

Centralization versus decentralizationcosts of decentralization

• Potential agency problems– effective control systems may be

expensive

• Coordination costs and failures

• Less effective use of central information

Benefits and costs of team decision making

• Benefits of team decision making– improved use of dispersed specific

knowledge– Employee buy-in

• Costs of team decision making– collective-action problems– free-rider problems

• Use teams if benefits exceed costs

Decision management and controlFama-Jensen

• Decision management– Initiation

– Implementation

• Decision control

– Ratification

– Monitoring

Influence costs

• Employees have incentives to influence managerial decisions

• Influence activities may entail costs– time away from the job– dysfunctional activities

• Limits on managerial discretion may reduce influence costs