Adaptive Diarchy: Authority between Two Heads

Abstract

An organization is referred to as diarchy if it appoints two executives with the same responsibility. This paper explores rationale behind diarchial organizations, starting from their most intriguing feature: A diarchy is composed of two agents with ambiguous authority allocation. We study a model where a principal must rely on a biased agent for information and execution. To seek extra advice, she can appoint a supervisor with intrinsic preferences over dissenting voice. However, the supervisor may collude with the agent and advocate the latter's advice. For the principal, the only way to prevent potential collusion is to make the supervisor roving. Nevertheless, the signal disclosed by the roving supervisor may become uninformative. We show that when vertical conflict of interest is moderate, adaptive diarchy emerges in equilibrium, and is characterized by three features. First, there exists a stationary supervisor. Second, although ex ante contingent delegation is impossible with the principal's lack of necessary expertise, the allocation of real authority is adaptive ex post. Third, the supervisor and the agent are of slight difference of opinion and similar relative status. We then embed our baseline setting in an infinite-horizon model to explore the historical regime shift from roving to stationary supervisors. We show that adaptive diarchy emerges in the proceed of the principal's learning about the extent to which enhancement of control erodes agents' participation.