Rational Inattention and Organizational Focus

By Peter Klein

That's the title of a new AER paper by Wouter Dessein, Andrea Galeotti, and Tano Santos (ungated version here). They model formally the problem of organizational adaptation when tasks are interdependent, but some tasks are more "influential" than others. If the costs of communication among agents are sufficiently high, it makes sense to coordiante organizational adaptation around just those influential tasks -- i.e., to focus on those "core" activities at the expense of others. Here's the abstract:

This paper studies optimal communication flows in organizations. A production process can be coordinated ex ante, by letting agents stick to a prespecified plan of action. Alternatively, agents may adapt to task-specific shocks, in which case tasks must be coordinated ex post, using communication. When attention is scarce, an optimal organization coordinates only a few tasks ex post. Those tasks are higher performing, more adaptive to the environment, and influential. Hence, scarce attention requires setting priorities, not just local optimization. Our results provide microfoundations for a central idea in the management literature that firms should focus on a limited set of core competencies.

They also show that as internal communication costs fall, the benefits of such focus are reduced, and organizations will tend to become more decentralized or "flatter" -- an idea easily expressed in Coasean transaction cost terms. Their model sheds light not only on the management notion of core competencies, but also on organizational leadership, with leadership defined as control over these core activities. 

Nicolai Foss and I explored similar ideas in an earlier, non-technical paper, "Why Managers Still Matter." There we suggested that even in flatter, less hierarchical organizations, there is a need for coordination if certain actors -- we called them "managers," rather than leaders -- possess information that is good enough to make optimal decisions even without consulting other actors. As with Dessein, Galeotti, and Santos's paper, the optimal structure depends on the cost of communicating private information througthout the organization.