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Authority vs Persuasion

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American Economic Review: Papers & Proceedings 2009, 99:2, 448–453 http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.2.448

Beliefs and disagreement in OrganizatiOns †

Authority versus Persuasion
By Eric Van den Steen*
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.1 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. 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
† Discussants: Navin Kartik, University of CaliforniaSan Diego; Wouter Dessein, University of Chicago; Muhamet Yildiz, Massachusetts Institute of Technology.

lead to a success, even though no player has private information, i.e., the players have differing priors. For such setting, Van den Steen (2002, 2004) and, independently, Yeon-Koo Che and Navin Kartik (2007) showed that open disagreement gives...

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