Timing Decisions in Organizations: Communication and Authority in a Dynamic Environment

This paper develops a theory of how organizations make timing decisions. We consider a problem in which an uninformed principal decides when to exercise an option and needs to rely on the information of an informed but biased agent. This problem is common in firms: examples include headquarters deciding when to shut down an underperforming division, drill an oil well, or launch a new product. We first study centralized decision-making, when the principal retains authority and communicates with the agent. We show that equilibria are different from those in the static "cheap talk" setting. When the agent is biased towards late exercise, full communication of information often occurs, but the decision is inefficiently delayed. Conversely, when the agent favors early exercise, communication is partial, while the decision is either unbiased or delayed. Next, we consider delegation as an alternative to centralized decision-making with communication. If the agent favors late exercise, delegation is always weakly inferior. If the agent favors early exercise, delegation is optimal if the bias is low. Thus, it is never optimal to delegate decisions such as plant closures, but may be optimal to delegate decisions such as product launches.