Strategic Automation and Decision-Making Authority

70 Pages Posted: 28 Sep 2018 Last revised: 5 May 2021

See all articles by Mustafa Dogan

Mustafa Dogan

MIT Sloan School of Management

Alexandre Jacquillat

Carnegie Mellon University

Pinar Yildirim

University of Pennsylvania - The Wharton School

Date Written: April 7, 2021

Abstract

This paper studies adoption and utilization of automation within firms of different organizational structures. We develop a theoretical model of organizational design with embedded cheap-talk. Specifically, we study a firm with a principal and two divisional managers, where production tasks can be automated in each division. Our findings show that there exists heterogeneity among firms in how they utilize automation based on their organizational structure. In specific, while more centralized firms may automate divisions facing higher risk and uncertainty, more decentralized firms choose to do the opposite. Moreover, as the overall automation capacity increases, firms follow distinctly different strategies to adapt to changing market conditions. With higher automation capacity, a firm is more likely to centralize decision-making at the top, rather than having a decentralized decision-making structure. This suggests that, the structure of firms and the role of managers may change as well, altering the allocation of decision-making rights within organizations. In consequence, as firms automate more and more tasks, mid-level managers become more focused on day-to-day operations and less involved in strategic decision-making on behalf of the firm. Finally, the paper shows that automation can be a strategic substitute to monetary contracts.

Keywords: Artificial Intelligence, Automation, Decision Making, Organizational Hierarchy

Suggested Citation

Dogan, Mustafa and Jacquillat, Alexandre and Yildirim, Pinar, Strategic Automation and Decision-Making Authority (April 7, 2021). Available at SSRN: https://ssrn.com/abstract=3226222 or http://dx.doi.org/10.2139/ssrn.3226222

Mustafa Dogan

MIT Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

HOME PAGE: http://sites.google.com/view/mustafadogan

Alexandre Jacquillat (Contact Author)

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States
4122683517 (Phone)

Pinar Yildirim

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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