Truth Be Told An Experimental Study of Communication and Centralization

• Authors: David J. Cooper and Jordi Brandts.
• BSE Working Paper: 1046 | June 18
• Keywords: experiments , asymmetric Information , Coordination , Organizations
• JEL codes: C92, D23, J31, L23, M52
• experiments
• asymmetric Information
• Coordination
• Organizations

We study the tradeoffs between centralized and decentralized management using a new experimental game, the decentralization game. Product types for two divisions are either chosen independently by the divisions (decentralization) or imposed by a central manager (centralization). Centralization makes it easier to coordinate the divisions’ product types but more difficult to take advantage of the divisions’ private information. We find that total surplus is highest when centralization is combined with free-form chat between the three players. This high performance occurs because divisions almost never lie about their private information, yielding unambiguous transmission of information from divisions to the central manager.