Authority versus Persuasion

This paper studies a principal’s trade-off between using persuasion versus using interpersonal authority to get the agent to ‘do the right thing’ from the principal’s perspective (when the principal and agent openly disagree on the right course of action). It shows that persuasion and authority are complements at low levels of effectiveness but substitutes at high levels. Furthermore, the principal will rely more on persuasion when agent motivation is more important for the execution of the project, when the agent has strong intrinsic or extrinsic incentives, and, for a wide range of settings, when the principal is more confident about the right course of action. Managers often face a choice between authority and persuasion. In particular, since a firm’s formal and relational contracts and its culture and norms are quite rigid in the short term, a manager who needs to prevent an employee from undertaking the wrong action has the choice between either trying to persuade this employee or relying on interpersonal authority. Herbert Simon (1947) noted, for example, that ‘when ... disagreement is not resolved by discussion, persuasion, or other means of conviction, then it must be decided by the authority of one or the other participant’ and that ‘in actual practice [...] authority is liberally admixed with suggestion and persuasion.’ Obviously, in choosing between persuasion and authority the manager makes a cost-benefit trade-off. This paper studies that trade-off, focusing in particular on agency conflicts that originate in open disagreement, in the sense of differing priors. ∗Van den Steen: Harvard Business School, 15 Harvard Way, Boston MA 02163, [email protected]. This paper benefitted from the discussion by Navin Kartik and from discussions with John Roberts and Bob Gibbons. I am also grateful to Roland Benabou for organizing the session. Interpersonal authority can be defined as ‘the right or power to give orders and enforce obedience.’ Kenneth J. Arrow (1974) stated that ‘the giving and taking of orders ... is an essential part of the mechanism by which organizations function’ while Simon (1947) observed that ‘(o)f all the modes of influence, authority is the one that chiefly distinguishes the behavior of individuals as participants of organizations from their behavior outside such organizations.’ 1 To that purpose, I will study a setting in which a principal and an agent are involved in a project. The project’s outcome depends both on decisions and on implementation effort by the agent, i.e., on effort to execute the decisions. A key issue is that the principal and agent may openly disagree on which decisions are most likely to lead to a success even though no player has private information, i.e. the players have differing priors. For such setting, Eric Van den Steen (2002, 2004) and, independently, Yeon-Koo Che and Navin Kartik (2007) showed that open disagreement gives rise to persuasion in a very natural way: each player believes that new information will confirm her prior and thus ‘persuade’ the other. It is exactly this type of persuasion that I will study here. Apart from such persuasion by collecting new information, I will also allow the principal to impose interpersonal authority, i.e., to make it costly for the agent to disobey an order of the principal. The sources of such interpersonal authority in a setting with open disagreement were studied in Van den Steen (2007), which showed that a firm, with its low-powered incentives and asset ownership, may be an important vehicle to convey authority to a principal. In this paper, I will use a reduced form that simply imposes a cost on the agent if he disobeys the principal. Probably the most important result of this paper is that the principal will rely more on persuasion for projects with a high need for motivation or effort. The reason is that – under the assumption that implementation effort is a complement to correct decisions, i.e., that executing a good project is more valuable than executing a bad project – the agent will exert more effort if he believes more in the project. From the manager’s perspective, persuasion will thus motivate the agent. This makes, on its turn, persuasion more attractive on projects where effort or motivation are more important. Since persuasion can cause compliance even in the absence of authority, it seems that an increase in persuasion should lead to a decrease in the reliance on authority. This is only partially true, however: persuasion and authority can be both substitutes and complements. In particular, I will show that authority and persuasion are substitutes when authority is highly effective but complements when authority is not very effective. To see why, note that if authority alone is not sufficient to make the agent comply but the combination of authority and persuasion is, then authority is more attractive in the presence of persuasion and viceversa, making them complements. In the other extreme, i.e. at high effectiveness, there are actually two mechanisms that make authority and persuasion substitutes. First, if both There is another natural form of persuasion in a context with differing priors. Suppose that players with differing priors may also have private information. The combination of information and priors makes observing others’ beliefs insufficient to infer their private information. Communication of private information may then serve to ‘persuade’ others. As shown in Van den Steen (2004), players will want to communicate information that confirms their belief to ‘persuade’ the other and will want to hide information that contradicts their beliefs. Obviously, weak attempts at ‘persuasion’ will be interpreted as a negative signal. But in the context of this paper’s model, persuasion would again lead to motivation. 2 authority and persuasion induce compliance then some of the potential (compliance) benefits of each have already been realized by the other, so that persuasion becomes less attractive in the presence of authority and vice versa. A second mechanism comes from the fact that persuasion may actually fail – when the new information contradicts the principal’s belief – and then ‘wake up sleeping dogs.’ In particular, if the (persuasion) signal confirms the agent’s view then an agent who would have obeyed otherwise may now decide not to obey. In that case, persuasion weakens authority, making authority and persuasion substitutes. It further follows that more important effort or motivation will make the principal rely less on authority in the case that authority is very effective. Finally, authority and persuasion being substitutes also implies, from the perspective of the principal, a trade-off between motivation and cooperation. This trade-off is recognized as one of the fundamental issues in organization design (John Roberts 2004). Another interesting, but less central, result is that the principal will rely more on persuasion (without authority) when agents have strong pay-for-performance incentives. The reason is that incentives and confidence in the project work multiplicatively. More intuitively: if the agent does not care about the outcome, then there is little gain from persuading him. Finally, there is also a positive relationship between the confidence of the principal and the use of persuasion (unless effort is not important and authority is very effective). This is caused by the fact that a more confident manager is more convinced that she will persuade the agent, making persuasion more attractive in her eyes. The reason why this relationship does not hold everywhere is that a more confident manager also cares more about the employee choosing the (subjectively) ‘correct’ action, which can make authority more attractive when effort is unimportant and authority is very effective. Apart from the work already mentioned, this paper is related to a number of strands in the literature. The first is work on persuasion, such as Paul Milgrom (1981), Vincent Crawford and Joel Sobel (1982), Milgrom and Roberts (1986), or Mathias Dewatripont and Jean Tirole (1999), and work on belief formation, such as Roland Benabou and Jean Tirole (2006) or Benabou (2008). The second is work that compares different modes of decisionmaking related to authority and persuasion such as Philippe Aghion and Jean Tirole (1997) or Wouter Dessein (2007). Of particular interest is also Benabou and Tirole (2002) who studied the connection between confidence and motivation, although they study confidence about one’s own abilities rather than confidence about the quality of a project. These two are not unrelated, however: skill and project quality both affect how effort translates into output. That relationship is reflected in the fact that both papers’s results are affected by whether effort is a complement to – versus a substitute for – skill or project quality. The two do have very different interpretations and very different implications, however. Finally, the