Consider the models of decision making with hierarchical versus flat organizational structures. Assume two types of projects with the following payoffs:
i. "Good" project: payoff = X (X>0)
ii. "Bad" project: payoff = Y (Y0)
Further assume that there are two types of project evaluation available:
i. "Tough" evaluation: accuracy = T (0T1)
ii. "Lenient" evaluation: accuracy = L (0LT1)Use these assumptions to answer the following questions:
A). If you have a hierarchical organization (two layers of project evaluation), would it be better to use a tough evaluation at the first stage and lenient evaluation at the second stage, or vice versa? Explain the effects on the probabilities of each type of outcome (false positives, etc.).Also, discuss intuitively the answer if the evaluation costs (time and otherr esources) are higher for a tough review than for a lenient one.
B). Under some circumstances, a hierarchical structure is preferred; under other circumstances, a flat structure is preferred. How is the choice between these two alternatives affected by: a). X (payoff on "good" projects) b). Y (loss on "bad" projects)c). q (probability of a "good" project)d. T or L (accuracy of decisions)
c. Consider a third kind of organizational structure - a "reverse hierarchy": at the second stage, instead of re-checking projects that are accepted at the first stage, the firm reconsiders those projects that were rejected at the first stage. What would be the effects of such an approach on one given new idea (not overall)? What kind of firm might consider this model, and under what circumstances?