That peer groups may have attractive properties in relation to the market for at least some individuals should be apparent from the above. But they also experience very real limitations. In comparison with both market and hierarchical organization, peer groups, being loose metering structures, are vulnerable to free rider abuses. In addition, collective decision-making processes are often relatively costly, as compared with hierarchical alternatives, by reason of bounded rationality.
1. Bounded Rationality
The anarchistic wing of the New Left, according to Lindbeck, holds that “economic decisions should be undertaken in about the same way as they are in a democratic family in a primitive subsistence economy. The ideal seems to be some kind of ‘council democracy in which people are supposed to convince one another or in which decisions are taken by general vote” (1971. p. 36). It may be described as an all-channel network, with everyone connected to everyone else, within which the absence of hierarchy prevails.
Peer group organization can be limited for bounded rationality reasons in both communication and decision-making respects. These are not matters with which the New Left literature has been greatly, or even often casually, concerned.23 Contrasting the all-channel network with the wheel,24 as shown in Figure 4, is useful for developing both points.
The feasible group size of a peer group is inherently limited by the information-processing limits of an all-channel network. Everything cannot be communicated to everyone and joint decisions reached without preempting valuable time that could be productively used for other purposes. Since the number of linkages in all-channel networks goes up as the square of the number of members,25 peer group size is perforce restricted. If, therefore, economies of scale (of either physical asset or information types) warrant the formation of a larger group than is consistent with an all-channel network, a change in organizational structure may be indicated.
The more severe limitations of the all-channel network can be exposed, however, without requiring that large group size be involved. Thus, suppose that physical asset indivisibilities of only modest proportions obtain —such that everything can feasibly be communicated to every member of the net- work. It is nevertheless possible that the all-channel network will incur inordinate expense in rule-making and decision-making respects.
To illustrate, consider the problem of devising access rules for an in- divisible physical asset which can be utilized by only one or a few members of the group at a time. Although any of a number of access rules may be efficacious, agreement on one must be reached. While a full group discussion may permit one of the efficient rules eventually to be selected, how much simpler if instrumental rules were to be “imposed’- authoritatively. Reorganizing from the all-channel to wheel network and assigning the responsibility to specify access rules to whichever member occupies the position at the center avoids the need for full group discussion with little or no sacrifice in the quality of the decision. Economies of communication are thereby realized.
Similarly, suppose that adaptations to changing market circumstances are needed in order to utilize resources efficiently. While a full group discussion could be held to determine what adaptation is to be made, this is time consuming and may yield little gain if — provided only that everyone pulls in harness — any of a number of adaptations would work. Authoritative assignment of decision-making responsibility to the occupant of the center is again indicated.
Subject to the condition that everyone is given a full turn at the center, the appearance of hierarchy hardly constitutes a violation of the peer group structure. The “leader” is merely a temporary first among equals. Something of this sort seems to be what Mandel had in mind in prescribing “self- management of free communes of producers and consumers, in which everybody will take it in turn to carry out administrative work in which the difference between ’director’ and ‘directed* will be abolished” (1968, p. 677). And Michels reports that trade union delegates, in the infancy of the English labor movement.”were either appointed in rotation from among all the members, or were chosen by lot” ( 1966. p. 66).
A problem with such a prescription nevertheless arises if administrative talent is unequally distributed. Unless the job of director is relatively undemanding or the membership is uniformly qualified with respect to administration, where this latter would normally require careful screening as a condition for peer group membership, a tradeoff between performance and peer group democracy must be faced. Either productivity sacrifices must be made, by permitting inferior members to take their turn at administration, or some members of the commune must be denied administrative responsibility.7 Bounded rationality differentials among the membership thus pose peer group strains. The transparent inequality of ability with respect to knowledge and oratorical gifts contributed to the abandonment of delegate selection by rotation or lot in the early trade union movement (Michels, 1966, p. 66).
Chief among the abuses to which peer group organization is vulnerable are: (1) ex ante nondisclosure or disguise of true productivity attributes by new members; (2) joining the peer group in order to acquire knowhow and to learn trade secrets, thereafter to set up a rival organization; and (3) ex post malingering. In all cases, the condition is explained by the conjunction of opportunistic attitudes on the one hand and information impactedness on the other. Correspondingly, the remedy is to be found in either rectifying opportunism or overcoming information impactedness.
It will be convenient to reinterpret the insurance example that was developed in Chapter 1 in productivity terms. Thus, let p in the insurance example now refer to the potential productivity of an individual. If members of the peer group are all rewarded by average group productivity (p¯). and if no individual is prepared to accept less than a p-∈ return, the peer group can be viable only if it can successfully screen out low productivity applicants. The peer group, like the insurer, is confronted with an adverse selection problem; low productivity applicants who successfully disguise their true attributes can not only exploit the group but may also render it nonviable.
Suppose, however, that peer groups can somehow screen out such applicants or that high productivity members are fully prepared to subsidize them. Peer group organization is not thereby saved: abuses of the second two types must also be considered. Disincentives must be devised to discourage members from joining for the strategic purpose of acquiring learning-by-doing advantages, and then resigning. Similarly ex post malingering. which is the peer group equivalent of moral hazard, constitutes a peer group threat.
Exploitation by members who would join only to be trained, and then resign, could be mitigated by requiring all new members to accept very low (less than p) compensation during the training period or by demanding that training costs be reimbursed whenever a member voluntarily terminates before a minimum membership period is completed (appropriate health and other exceptions admitted). Although such stipulations are scarcely indications of trustful behavior, and thus might be resisted by “pure“ peer group advocates, the spirit of peer group organization essentially survives such covenants and provisions.
By contrast, ex post malingering poses more severe difficulties — not that the peer group is entirely lacking in resources in this respect. Informal peer group pressures can be mobilized to check malingering. Hampton, Summer and Webber describe the group disciplinary effects of informal organization in four stages (1968, p. 282). The most casual involves cajoling or ribbing. If this fails, rational appeals to persuade the deviant to conform are employed. The group then resorts to penalties by withdrawing the social benefits that affiliation affords. Finally, overt coercion and ostracism are resorted to. The internal atmosphere is progressively changed to the disadvantage of the malingerer for the purpose of bringing him into line.
That the peer group is able to discourage malingering in this way does not mean that other more effective checks cannot be devised. Whether, however, such additional or alternative controls would be consistent with the peer group structure is seriously to be questioned. Although, as discussed in Section 3, below, recourse to monitoring and the payment of discriminating wages have attractive properties for the purpose of checking free riders, such controls are tantamount to introducing hierarchy.
Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.