Market Structure and Optimal Management Organizations

This article focuses on the decisionmaking role of management under the assumption that managers are fallible and thus make honest decision errors. In our model the owner of the firm must decide how to structure management, how many managers to hire, and what decisionmaking rule to adopt to determine whether to proceed with a randomly chosen project, given that individual managers are only stochastically correct in their evaluations. We find that the decision rule for rejecting projects is independent of the degree of competition in the product market, but that the size of the organization is not. Furthermore, because competition among firms leads to resampling rejected projects, it results in long-run inefficiencies that are avoided in more concentrated markets.