Table Of ContentMathematics / Mathematical Modeling K B
O U Systems Evaluation, Prediction, and Decision-Making Series
R R
Introduction to Theory of Control in G K
I O
Organizations explains how methodol- N V INTRODUCTION TO
ogies from systems analysis and control • •
N G
theory, including game and graph theory,
O O
can be applied to improve organizational V U
I THEORY OF CONTROL
K B
management. The theory presented ex- O K
tends the traditional approach to manage- V O
ment science by introducing the optimiza- IN ORGANIZATIONS
tion and game-theoretical tools required
to account for the special nature of human
beings being viewed as control objects.
I
CN
The book introduces a version of mechanism design that has been customized to
OT
solve the problems that today’s managers must contend with. All mathematical
NR
models and mechanisms studied are motivated by the most common problems
TO
encountered by managers in firms and non-profit organizations.
RD
OU
Requiring no prior knowledge of game theory or mechanism design, the book
LC
includes a systematic introduction to the underlying methodology of modern
IT
theory of control in organizations. The authors use formal methods to construct
N
I
robust and efficient decision-making procedures that support all aspects and O
stages of management activity over all decision horizons—from operational to ON
strategic management. R
T
G
O
The mathematical and methodological backgrounds of the organizational A
mechanisms discussed are not limited to game theory but also include systems NT
analysis, control theory, operations research, and discrete mathematics. IH
Z
E
A
The book includes a set of exercises in each chapter—from simple to advanced— O
T
that provide the reader with the understanding required to integrate advanced R
I
methods of optimization, game theory, and mechanism design into daily OY
managerial practice. N
O
S
F
VLADIMIR N. BURKOV • MIKHAIL GOUBKO
K25283
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Introduction to
Theory of Control
in Organizations
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Systems Evaluation, Prediction, and Decision-Making Series
Series Editor
Yi Lin, PhD
Professor of Systems Science and Economics
School of Economics and Management
Nanjing University of Aeronautics and Astronautics
Grey Game Theory and Its Applications in Economic Decision-Making
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Introduction to Theory of Control in Organizations
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Investment and Employment Opportunities in China
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Systems Evaluation: Methods, Models, and Applications
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Systemic Yoyos: Some Impacts of the Second Dimension
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ISBN 978-1-4200-8741-3
K25283_Book.indb 2 1/29/15 1:00 PM
Introduction to
Theory of Control
in Organizations
Vladimir N. Burkov • Mikhail Goubko
Nikolay Korgin • Dmitry Novikov
K25283_Book.indb 3 1/29/15 1:00 PM
CRC Press
Taylor & Francis Group
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Boca Raton, FL 33487-2742
© 2015 by Taylor & Francis Group, LLC
CRC Press is an imprint of Taylor & Francis Group, an Informa business
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Version Date: 20141204
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Contents
Introduction ........................................................................vii
1 Control and Mechanisms in Organizations..............1
1.1 Control Problems in Organizational Systems ............7
1.2 Models of Decision Making ......................................24
1.3 Basics of Game Theory .............................................31
1.4 Classification of Control Problems in
Organizational Systems .............................................45
2 Examples of Control Mechanisms ..........................57
2.1 Planning Mechanisms ...............................................57
2.2 Taxation and Pricing Mechanisms ............................63
2.3 Multichannel Mechanisms ........................................68
2.4 Incentive Mechanisms for Cost Reduction ...............69
3 Incentive Mechanisms. ...........................................73
3.1 Incentive Problem......................................................76
3.2 Basic Incentive Mechanisms ....................................86
3.3 Incentive Mechanisms in Multi-Agent Systems.........97
3.4 Mechanisms of Distributed Control ........................107
4 Planning Mechanisms ..........................................121
4.1 Incomplete Information in Organizational
Systems ....................................................................123
4.2 Revelation of Information .......................................125
4.3 Mechanisms of Resource Allocation .......................132
4.4 Mechanisms of Transfer Prices ...............................142
4.5 Expert Mechanisms .................................................147
v
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vi ◾ Contents
4.6 Basic Model of Adverse Selection ...........................153
4.7 Rank-Order Tournaments........................................158
5 Informational Control Mechanisms .....................169
5.1 Model of Informational Control ..............................173
5.2 Reflexive Games ......................................................179
5.3 Informational Equilibrium .......................................186
5.4 Applied Models of Informational Control ..............199
6 Mechanisms of Organizational Structure
Design ................................................................233
6.1 Problems of Organizational Hierarchy Design .......233
6.2 Models of Organizational Structure Design ...........258
6.3 General Model of Management Hierarchy .............268
6.4 Optimal Tree-Shaped Hierarchies...........................283
Conclusion ........................................................................305
Topics for Self-Study ..........................................................307
Literature ..........................................................................309
Index ..................................................................................321
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Introduction
T
his book explains how methodology of systems analysis
and mathematical methods of control theory (including
game theory and graph theory) can be applied to organiza-
tional management. The theory presented below extends the
traditional approach of management science by introducing
the optimization and game-theoretical tools for systematic
accounting of the special nature of human being as a control
object (such as opportunism, selfish behavior, information
manipulation). Formal methods are used to construct robust
and efficient decision-making procedures (so-called mecha-
nisms), which support all aspects and stages of management
activity (planning, organization, motivation, and monitor-
ing), over all decision horizons, from operational to strategic
management.
We use mechanism design theory to construct and study
mechanisms of control in organizations. Mechanism design is
a branch of game theory. It deals with situations of interaction
between a principal and a set of agents, typically in the pres-
ence of asymmetric information. Nowadays, mechanism design
underlies modern neo-institutional economics. Recognizing the
importance of mechanism design in contemporary economic
analysis, in 2007 the Nobel Memorial Prize in Economic Sciences
was awarded to Leonid Hurwicz, Eric Maskin, and Roger
Myerson, who laid the foundations of mechanism design theory.
Nevertheless, economic theory is only one of many pos-
sible applications of mechanism design theory. In addition,
vii
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viii ◾ Introduction
mechanism design intersects with the social choice theory and
is extensively used in political sciences. Management in all
known organizations is based on principal–agent relations, so
mechanism design seems to be a natural formalism to study
interactions between employees in organizations.
At the same time, formal methods of mechanism design are
not too widely spread in management theory and practice.
One of the reasons is the complexity of underlying mathemat-
ics and the lack of wide-scale experimental verification of
organizational mechanisms’ efficiency in business. Another
important problem, which militates against penetration of
the methods of mechanism design into management science,
is that justification of conflicting interests is just one of the
aspects of a management problem. It also includes complex
optimization issues and is sufficiently limited by humans’
bounded rationality, cost of information acquisition, legal
restrictions, and great variety of informal factors.
In this book we introduce an integrated theory, which is
based on a version of mechanism design customized to solve
the problems of management in organizations. All mathemati-
cal models and mechanisms studied hereinafter are motivated
by the day-to-day problems met by managers of firms and
nonprofit organizations. When possible, we avoid bulk proofs,
referring interested readers to the special literature. The focus
often goes beyond the stylized framework of a principal–agent
game and incorporates the related issues (e.g., optimal produc-
tion scheduling, performance assessment, and organizational
structure design) to construct integrated organizational mecha-
nisms, which solve specific management problems. So, the
mathematical and methodological background of the discussed
organizational mechanisms is not limited to game theory
but also includes systems analysis, control theory, operations
research, and discrete mathematics.
This textbook presents an introductory course intended for
advanced graduate students specializing in management sciences
and in applications of control theory and operations research
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Introduction ◾ ix
to business administration. Control theorists will extend their
skills with contemporary methods of mathematical modeling of
organizational behavior and control, while for business admin-
istration students this course will complement their knowledge
in organization studies and in the theory of the firm with formal
methods improving relevance and efficiency of management
decisions by accounting for employees’ strategic behavior.
The approach adopted in this textbook is based on the meth-
odology of systems analysis and control theory. This system-
based view dictates the structure of the book as it requires an
introductory chapter positioning the mechanisms and the model
of employees’ behavior management on a broader field of con-
trol problems in organizational systems of different nature.
The material has the following structure (see Figure 1).
Chapter 1, “Control and Mechanisms in Organizations,”
gives a general formulation of control problems in
Chapter 1. Control and
Mechanisms in Organizations
Chapter 2. Examples
of Control Mechanisms
s
m
s
ni
Incentive MechanismsChapter 3. Planning MechanismsChapter 4. Informational Control Mechapter 5. Mechanisms Chapter 6. of Organizational Structure Design
a
h
C
Figure 1 Textbook structure.
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