Strategic Automation and Decision-Making Authority

Abstract

In this paper, we investigate how automation alters decision-making responsibilities of mid- and upper-level managers within organizations. We develop a theoretical model of a firm with three organizational layers and two divisions. The firm is managed by an executive (principal); divisions are led by mid-level managers; and production tasks are performed by workers, or alternatively, are automated. There are two frictions between the firm’s middle and upper management. First, there is information asymmetry: a manager holds information that is specific to his division and critical for the firm’s decision-making, but the principal does not have access to this information. Second, the objectives of the principal and the manager are only partially aligned: while the principal cares about maximizing the total firm profit, the manager cares about his division more than the other division. In this environment, through an extensive-form game with embedded cheap talk, we show that the princi- pal automates tasks strategically to manage intra-firm frictions and protect divisions from negative produc- tivity shocks. With higher levels of automation, the principal becomes more likely to retain decision-making rights by choosing a “top-down” structure as opposed to a structure where she “delegates” decision-making authority to a manager. Therefore, automation increases centralization of decision-making power at the upper level of organizations. As a consequence, as firms automate tasks, mid-level managers become more focused on day-to-day operations and less involved in strategic decision-making on behalf of the firm.