Richard Ishac
Job Market Candidate, Queen's University

(Job Market Paper)

This paper develops a theoretical framework that incorporates the deleterious effects of tournaments on cooperation in order to generate a more complete theory of the optimal organizational structure. I study how well information will be generated by the agents and utilized by the decision maker(s) in either a centralized or a decentralized setting. I show that tournaments can achieve what I refer to as the Constrained First Best outcome and will negatively impact cooperation only in a decentralized setting. This paper also suggests that a limited liability constraint will increase the complementarity between decentralization and the agents' productivity. Furthermore, I argue that periods of economic contraction (expansion) will favor a centralized (decentralized) setting and I uncover a fundamental trade-off between communication noise, which depresses centralized profits, and production noise, which depresses decentralized profits. Finally, I show that managers might find it optimal to communicate less with highly motivated employees than with regular employees.

Using a model with an overall population consisting of two different groups, I show that imposing optimal constraints on the set of implementable policies based on demographics and misalignment of preferences increases social welfare. I also argue that the more misaligned the preferences of two groups are, the more restrictive these optimal constraints should be. When using these optimal constraints or no constraints at all, allocating power based on the plurality rule is optimal. However, if restrictive sub-optimal constraints are utilized, then allocating power to a minority group becomes potentially optimal. Finally, I show that while overly-laxed sub-optimal constraints still increase welfare, overly-burdensome sub-optimal constraints do so if the two groups' preferences are sufficiently misaligned.