Economics of Committees

Committees: small (like an Executive Committee of a corporation) or large one (like EU parliament) are an important instrument of contemporary decision-making. We often hesitate to entrust decision-making authority to any single individual, say, CEO of a company or a head of state. There exists an implicit belief that the collective wisdom of a committee surpasses that of any individual member, thereby mitigating some of the most significant errors that might otherwise occur. However, it is also widely acknowledged that committees have drawbacks, such as the substantial time investment required for decision-making and the delays in reaching agreements.

In the paper “Economics of Committees” by Raaj Kumar Sah and Joseph E. Stiglitz, the authors analyze the economic performance of committees. Specifically, they focus on key aspect of organisational decision-making:

Consensus vs Errors:

• The paper examines the optimal degree of consensus required for committee decision-making (such as accepting or rejecting projects).
• It considers the trade-off between Type-I errors (rejecting good projects) and Type-II errors (accepting bad projects).
• If the two types of errors are equal, the marginal majority rule is optimal (i.e., for every 2-person increase in the committee size, the optimal consensus increases by 1).
• If losses from both types of errors are equal, the majority rule becomes optimal

Interesting are the assumptions that drive the results:

Quality of projects proposed to Committee for approval:

• if quality of projects is high (in extrem case all projects are good) there is less chance to make an error and hence there is no need for unanimous decision rule. In such a case one could even adopt following approval rule: "If any of the committee members approves the project then the project is approved" . Consequently, the larger the committee the higher is the chance for a project to be approved.
• if quality of projects is poor then stricter approval rules are a better choice although there is also an increased chance of not approving a good project.

Competence of Committee members

• Excellent competence of the Committee members (any of the Committee members makes a right decision with high probability): lower quorum is optimal.
• Poor competence of the Committee members: a higher quorum is optimal to avoid errors (always at cost of increased chance of not approving good projects).

As always an important assumption is risk-aversion of the actors.

What do you think - can Economics of Committees be applied to optimise decision making in your Company?

Share your thoughts!