H505,  Spring, 1998
Edward Lazear, Stanford University
 Lecture 7
 The Job, Authority and Responsibility
I. Multitasking and Multiskilling:
    1. What’s the difference?
      1. Multiskilling means that a given individual possesses more than one skill.  Small businesses by necessity have multiskilled people.
      2. Multitasking is where an individual performs more than one task.  A multiskilled individual may still specialize; but she has the ability to change the thing in which she specializes.
    2. Advantages to multitasking are usually advantages to multiskilling.  Only when skills get stale from lack of use is multitasking necessary.  Some advantages to multitasking, per se.
      1. May save transportation and/or communication time
      2. May save set-up time.  (Spot and pick the fruit)
      3. May save on bureaucracy.  Less paper generated since don’t have to communicate (as much) with oneself.
       
    3. Advantages of multiskilling
      1. Flexibility.  A given worker can fill in for others when needed.  This is less important in a large firm because the standard deviation is small relative to the mean as sample size gets large.
      2. Communication is enhanced between employees working in different fields.
      3. Innovation is enhanced
        31 As with communication, better ideas when see the entire picture
        32 Less opposition to innovation by those whose skills do not become obsolete.  With multiskilling, it is less likely that any individual will suffer a huge loss when one skill becomes obsolete.
     
II. Errors and Delegation of Authority
            There is a tradeoff  between false positive and false negative  error.  If a manager adopts a very aggressive policy and accepts every new project that comes by, she will never commit a false negative  error.  Because she always produces, she can never find herself in the box where she decided not to produce, but should have.  However, she is certain to make a false positive errors whenever a project is unprofitable.  Since she always produces, and when producing is a bad decision she commits a false positive error.
             Alternatively, she can adopt an extremely conservative posture, rejecting every new project that comes along.  Because she never produces a new line, she can never find herself in the box where she produced, but shouldn’t have.  Thus, she never commits a false positive error.  But now, false negative  errors are certain.  Whenever a product is profitable, she commits a false negative  error because she necessarily rejects it. The more conservative her posture, the less likely is a false positive error and the more likely is a false negative  error.
            The following diagram shows the tradeoff.  On the horizontal axis is the probability of making a false positive error, that is, going ahead with the project, given that the project is unprofitable.

             On the vertical axis is the probability of making a false negative error, that is rejecting the project, given that the project is profitable.  At point D, all projects are accepted so the probability of accepting a project, given that it is unprofitable is 1.  At point C, all projects are rejected, so the probability of rejecting a project, given  that it is profitable, is 1.  The tradeoff is shown by the solid line between C and D.  If some projects are accepted and some are rejected, then the firm ends up at an interior point, like A.  At A, some, but not all,  good projects are rejected, and some, but not all, bad projects are accepted.  How does the firm decide on which rule to choose?  If it is very costly to accept bad projects, the firm wants a more stringent rule, which moves it toward C.  If it is very costly to pass up a good project, then the firm wants a more lenient rule, pushing it toward D.
             The goal is to enhance the information set so as to allow for less of each type of error.  If decisions were better informed, then the tradeoff would be along the dotted curve, rather than the solid one.  Note that on the dotted curve, the firm can make less of each type of error.  Point B implies less of false positive error and less of false negative  error than point A.  The firm would always prefer the dotted curve to the solid curve, but for one thing: Information is costly.  Decisions are better along the dotted curve, but the cost of obtaining the dotted curve might be more delay or more consulting fees.
    We now return to job design and authority patterns.  By structuring the authority relations in different ways, different kinds of errors are made more or less likely.
            First, a worker can be told that she may reject any project, but does not have the authority to accept any project on her own.  All that she can do is render a recommendation to accept.  Her superior may then be given the authority to make the final call.  Such a structure works in the direction of reducing false positive error and increases false negative  error.  Workers cannot autocratically accept a project so they cannot make a false positive error.  Workers never accept bad projects; only superiors do.  But the rule does allow workers to reject projects.  This means that they may reject good projects before their superiors get the opportunity to reverse the decision, which increases the likelihood of false negative  error.
            Second, a flat authority structure results in a different combination of errors than does a steep pyramid. The hierarchical firm has a different decision structure than the flat firm.  In the flat firm, both workers do full reviews on projects.  In the hierarchical firm, a supervisor does not review a project until a subordinate already has reviewed it.  This means that fewer projects get full reviews than is the case in a flat firm.  But those projects that get positive reviews from the subordinate get a second review from the superior.  Which structure is better?
             It is easy to show formally (see the appendix t Ch 16) that a hierarchical structure will approve fewer projects than a flat decision structure.  The hierarchical structure makes fewer false positive errors, but more false negative  errors.  Fewer bad projects are accepted by the hierarchical firm, but more good projects are rejected.  There are two reasons.  First, since the hierarchical structure requires two approvals rather than one, the test that a project must pass is more stringent.  Second, since two persons are required for an evaluation, rather than one, fewer decisions are made.
            There is another possibility.  The structure can be made flat, but second opinions can be required.  Rather than creating superior and subordinate, the firm can simply require that every project reviewed by I is also reviewed by II,  and vice versa.  If both agree, the decision is obvious.  If they disagree, then some other rule must be used to reconcile the differences.  There are a number of possibilities, but for our purposes, the details of reconciliation are irrelevant.  It is always true, irrespective of the reconciliation rule used that a second opinion structure is less stringent than a hierarchical structure, but more stringent than a flat structure, where one worker has complete authority to approve or disapprove.  (The formal derivation of this proposition is contained in the appendix to Ch 16).
    The logic is this.  The second opinion structure is less stringent and approves more projects than the hierarchical structure.  Under the hierarchical structure, when I rejects a project, II never even sees it.  II  only sees those projects that I  passes on.  In the case of a second opinion structure, II sees even cases that I  rejects.  If II likes the project, then the two opinions must be reconciled.  As long as some of these reconciliations result in positive outcomes, projects that would not have been accepted by the hierarchical structure will be accepted by the second opinion structure.
             The second opinion structure is more stringent than a flat, single decision maker structure.  This is somewhat less obvious than it seems.  It is true that a second opinion can sometimes reverse an initial to reject, but it is also true that a second opinion can reverse an initial decision to accept.  The main reason that a second opinion structure is more stringent is that when second opinions are required, more projects are rejected without a serious screening at all.  If it takes one for one person to review a project, then the flat structure with a single decision maker produces two decisions per week:  one by I  and one by II.  By contrast, the second opinion structure produces only one decision per week since both I  and II  must review every proposal.  During week one, I  reviews project  A and II reviews project B.  During week two, they switch.  By the end of the two week period, only two projects have been reviewed by both managers, meaning that one project per week is reviewed.  Projects that are not reviewed are rejected, by definition.  The flat structure results in half the rejections by failure to review and thereby is a less stringent criterion.  The flat structure increases the likelihood of making false positive errors, but decreases the likelihood of making false negative  errors.
           Figure 7.2 augments figure 7.1 by showing location of the different job authority structures with respect to false positive and false negative  errors.  Hierarchical structures locate on the northwestern part of the tradeoff curve.  Hierarchical structures minimize the likelihood of accepting a project that is bad, but maximize the likelihood of passing by a project that is good.  Flat structures with single decision makers lie in the southeast section of the tradeoff curve.  Flat structures minimize the likelihood that a good project will be rejected, but maximizes the chances that a bad project will be accepted.  Second opinion structures lie somewhere in the middle, neither minimizing nor maximizing the likelihood of false positive or false negative  errors.

            Which do job authority structure should the firm choose?  Since there is a tradeoff implicit in the choice, the decision on which authority structure to use depends on the payoffs associated with the job.  Since three structures are identified, let us consider three types of payoff regimes.   These are shown in figure 7.3, 7.4, and 7.5.



            Figure 7.3 shows a payoff structure that has been labeled Exxon Valdez. The losses associated with the oil spill ran into the billions of dollars.  The Exxon Valdez situation is typical of one variety of payoff structure.  Doing the job extremely well results in small gains relative to the expected amount, but making a mistake can be disastrous.  The upside of payoffs is limited to $100,000 in figure 7.3, but the downside implies losses in the billions.
            When the payoff structure looks as it does in figure 7.3, the firm wants to minimize type 1 error, and is willing to accept higher levels of false negative  error. Hierarchical decision making is appropriate here.
            Figure 7.4 has a payoff function with a big upside and limited downside.  This corresponds to new firms.  Most of the time, they fail, producing negative or only slightly positive profit levels.  Once every so often, as is the case with Netscape, the innovators hit it big, earning in the many millions of dollars.  Which structure favors the upside?  The answer, summarized in figure 7.2, is that a flat structure with very little supervisory veto power minimizes the amount of type 2 error.  Young firms often do give a great deal of authority to each worker.  It is sometimes argued that creative people do not do well in firms that emphasize the hierarchy to heavily.  Although true, it may not be the people.  Since a hierarchical structure tends to err in the direction of caution, minimizing false positive error, and tolerating the rejection of some good projects, a hierarchical firm does not encourage creativity.  Flatter authority structures, which allow each worker more choice, also allow creativity to flower.  Risky, wild ideas that would be rejected in a hierarchical structure, are allowed to proceed in the flat, single decision maker structure.
            Most firms are neither in the Exxon Valdez category, nor in the Netscape Category.  Payoffs are more symmetric in most business, especially established ones.  Figure 7.5 shows a suggested payoff function for a gasoline station in my town.  Great performance and innovative work are unlikely to generate the large upside that Netscape experienced.  Poor performance and shoddy workmanship may cost the firm some money, but not the disastrous losses incurred by Exxon when the oil spill occurred.  In this case, the firm prefers tolerable levels of false positive error and false negative  error,  minimizing neither at the expense of the other.  In the service station example, a mechanic who is uncertain about a particular automobile’s problem asks his fellow mechanic for a “second opinion.”  But the setup tends to be non-hierarchical.
            In Figure 7.1, two curves were shown.  The dotted curve lies inside the solid curve.  Others things equal, it is better to face the constraint of the dotted curve than of the solid curve because for any given level of false positive error, the dotted curve implies less false negative  error than does the solid curve (except at the endpoints).    How does the firm move to the dotted curve?
    Unfortunately, this cannot be done without cost.  Fewer errors are made along the dotted curve than on the solid curve.  To get to the dotted curve, it is necessary to improve the decision process.  There are a number of possibilities, all of which are costly.  First, the firm can attempt to hire better evaluators by going for more able, higher priced workers.  Second, the firm can allow any given evaluator to take more time evaluating each project.  Third, the firm can make more information available to the evaluator, either by hiring outside consultants or buying other services.  Whether any of these steps is profitable depends on how much is gained relative to the amount lost  by making poor decisions.