Incentives, iterative communication, and organizational control

This paper defines a class of incentive mechanisms for decentralized organizations when communication between the members of the organization must, a priori, be iterative in nature. Payoff functions for the members of the organization are defined and these functions along with the set of possible member strategies are viewed as defining an N-person game. We define a solution concept for this game that has the following properties: the members of the organization (nontrivially) maximize their payoffs at a “solution” and the overall organizational goals are achieved by any “solution.” Acting in accordance with the behavioral rules of the organization, i.e., “telling the truth,” is shown to be among the “solutions” to the game. Thus, the members of the organization are shown to have an incentive to follow these rules, since doing so is an individually optimal strategy that is, in some sense, easy to calculate. Arrow [I] has defined the problem of organizational control as consisting of two parts: (1) the choice of operating (behavioral) rules, i.e., communication and decision making rules and (2) the choice of enforcement rules, i.e., rules that induce the members of the organization to follow the operating rules.’ There is a vast literature in economics concerned with the definition and/or analysis of operating rules for decentralized organizations, theoretical planning procedures being the most obvious [2, 14, 18].2 These various