On the Design of Simple Organisations

Abstract

We study a model for evaluating an organisation’s design wherein its principal (a) delegates outcome-determining tasks to agents with heterogeneous preferences, (b) guides their performance of these tasks via action recommendations, and (c) is better informed than the agents about the state of the world and selectively shares her information with them. An organisation design specifies the agents’ action spaces, a mode of communicating action recommendations, and a protocol for sharing the principal’s information with the agents. A design is evaluated by means of an ‘optimal equilibrium coordination plan’. Our main result concerns the existence of such plans. We apply it to organisations wherein agents have egoistic preferences defined on their private outcomes and each such outcome is determined by a private contract between the principal and the relevant agent. We also apply it to a model of the firm