Information centralization of organizational information structures via reports of exceptions

A team theoretic model that establishes a criterion (decision rule) for a financial institution branch to report exceptional loan requests to headquarters for action was compared to such choices made by graduate industrial management students acting as financial vice-presidents. Results showed that the loan size criterion specified by subjects was typically greater than the optimal criterion when the optimal criterion was small relative to the maximum loan size, and less than the optimal criterion when the optimal criterion was large relative to the maximum loan size. That is, subjects specified criteria that would result in the reporting of too few exceptions (a case of informational overdecentralization) and too many exceptions (a case of informational overcentralization) when the optimal criterion was relatively small and large respectively. The behavior exhibited was attributed in part to a subject's utility function, which was inferred to have a Friedman-Savage double inflected structure.