Performance Gaps and Managerial Decisions: A Bayesian Decision Theory of Managerial Action

An extensive literature finds that managerial decisions matter for the performance of public organizations, yet little attention has been devoted to why managers make the decisions that they do. This article builds a theory of public management decision making based on the simple assumption that managers are concerned with performance and the performance gaps of their organization. Using a logic borrowed from bounded rationality and Bayesian decision theory, we theorize a set of prior expectations. Whether the organization meets these expectations or fails to do so is then used to specify a series of precise hypotheses about when managers make a variety of decisions including when to seek additional information, take risks, decentralize the organization, determine goals, or select a managerial strategy as well as other managerial actions. The logic of the theory can easily be extended to decisions about selecting goals or managerial strategy. We then extend the basic theory by considering multiple goals, hierarchy, and alternative theoretical approaches.