Business Management Dynamics

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ISSN: 2047-7031

bmd Business and Management Dynamics bmd
ISSN: 2047-7031  
Volume  5   Issue 8  2016  
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Article Abstract
Voting or technical evaluation: the optimal rule to choose a manager under uncertainty
Keywords:  choice of managers; voting; corporate structure
PEDRO HEMSLEY
The choice of managers is one of the most important tasks in any firm. This choice is often difficult because the firm does not know perfectly the ability of candidates to perform the job. To deal with this uncertainty, it is possible to choose managers through a voting procedure in a board, or one may use some exogenous technical evaluation, such as an exam or a contest, to try to learn about the quality of each candidate. There is a trade-off between these two procedures: voting decreases the weight of idiosyncratic errors, but is subject to a public good problem that affects any electoral procedure since the effort by one member to learn about the candidates benefits all other members through an increased probability of choosing correctly. The other members may free-ride on this effort and decrease the amount of time they dedicate to gathering information about the candidates. I show that a technical evaluation gives a higher probability of choosing correctly even when it is less efficient than any individual analysis: the free-riding problem is more serious than the risk of idiosyncratic errors. Voting should not be used when there is a problem of asymmetric information; it is only a tool to aggregate heterogeneous preferences.
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