IDEAS home Printed from https://ideas.repec.org/a/eee/gamebe/v95y2016icp88-106.html
   My bibliography  Save this article

Economics of leadership and hierarchy

Author

Listed:
  • Zhou, Junjie

Abstract

This paper explores leadership within hierarchical organizations. For each hierarchy, I consider a dynamic signaling game in which each player observes only the actions of his direct superiors before choosing his action. At the top of the hierarchy are the leaders, who learn the state from nature. The hierarchy controls the flow of information and the timing of the game, and determines the equilibrium output and welfare. I show that the welfare-optimal hierarchy is the chain, because it maximizes the incentive of players to “lead by example” for their subordinates. The chain remains optimal even in the presence of verifiable or unverifiable costly information acquisition by the leaders.

Suggested Citation

  • Zhou, Junjie, 2016. "Economics of leadership and hierarchy," Games and Economic Behavior, Elsevier, vol. 95(C), pages 88-106.
    • Handle: RePEc:eee:gamebe:v:95:y:2016:i:c:p:88-106
    DOI: 10.1016/j.geb.2015.12.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S089982561600004X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.geb.2015.12.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eyal Winter, 2004. "Incentives and Discrimination," American Economic Review, American Economic Association, vol. 94(3), pages 764-773, June.
    2. Yingyi Qian, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 527-544.
    3. Calvo, Guillermo A & Wellisz, Stanislaw, 1978. "Supervision, Loss of Control, and the Optimum Size of the Firm," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 943-952, October.
    4. Patrick Bolton & Mathias Dewatripont, 1994. "The Firm as a Communication Network," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 809-839.
    5. Patrick Bolton & Markus K. Brunnermeier & Laura Veldkamp, 2008. "Leadership, Coordination and Mission-Driven Management," NBER Working Papers 14339, National Bureau of Economic Research, Inc.
    6. Venkatesh Bala & Sanjeev Goyal, 1998. "Learning from Neighbours," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(3), pages 595-621.
    7. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
    8. Hermalin, Benjamin E, 1998. "Toward an Economic Theory of Leadership: Leading by Example," American Economic Review, American Economic Association, vol. 88(5), pages 1188-1206, December.
    9. Eyal Winter, 2006. "Optimal incentives for sequential production processes," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 376-390, June.
    10. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    11. Alex Gershkov & Eyal Winter, 2015. "Formal versus Informal Monitoring in Teams," American Economic Journal: Microeconomics, American Economic Association, vol. 7(2), pages 27-44, May.
    12. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-180, January.
    13. Hermalin, Benjamin E., 2007. "Leading for the long term," Journal of Economic Behavior & Organization, Elsevier, vol. 62(1), pages 1-19, January.
    14. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    15. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    16. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
    17. Marschak, Thomas & Reichelstein, Stefan, 1998. "Network Mechanisms, Informational Efficiency, and Hierarchies," Journal of Economic Theory, Elsevier, vol. 79(1), pages 106-141, March.
    18. Mana Komai & Mark Stegeman & Benjamin E. Hermalin, 2007. "Leadership and Information," American Economic Review, American Economic Association, vol. 97(3), pages 944-947, June.
    19. Prat, Andrea, 1997. "Hierarchies of Processors with Endogenous Capacity," Journal of Economic Theory, Elsevier, vol. 77(1), pages 214-222, November.
    20. Daron Acemoglu & Matthew O. Jackson, 2015. "History, Expectations, and Leadership in the Evolution of Social Norms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(2), pages 423-456.
    21. Mana Komai & Mark Stegeman, 2010. "Leadership based on asymmetric information," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 35-63, March.
    22. Timothy van Zandt, 1999. "Real-Time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 633-658.
    23. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    24. Parimal Kanti Bag & Nona Pepito, 2012. "Peer Transparency In Teams: Does It Help Or Hinder Incentives?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1257-1286, November.
    25. Zhou, Junjie & Chen, Ying-Ju, 2015. "Key leaders in social networks," Journal of Economic Theory, Elsevier, vol. 157(C), pages 212-235.
    26. Eyal Winter, 2010. "Transparency and incentives among peers," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 504-523, September.
    27. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-1146, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Qiang Fu & Ming Li & Xue Qiao, 2022. "On the paradox of mediocracy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(2), pages 492-521, April.
    2. Kohei Daido & Takeshi Murooka, 2022. "The Provision of High-powered Incentives under Multitasking," Discussion Paper Series 242, School of Economics, Kwansei Gakuin University.
    3. Kohei Daido & Takeshi Murooka, 2022. "The Provision of High-powered Incentives under Multitasking," OSIPP Discussion Paper 22E005, Osaka School of International Public Policy, Osaka University.
    4. Susumu Cato & Akifumi Ishihara, 2017. "Transparency and Performance Evaluation in Sequential Agency," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(3), pages 475-506.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cho, Myeonghwan, 2010. "Efficient structure of organization with heterogeneous workers," Journal of Mathematical Economics, Elsevier, vol. 46(6), pages 1125-1139, November.
    2. Thomas Hubbard & Luis Garicano, 2004. "Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Services Industry," Working Papers 04-07, Center for Economic Studies, U.S. Census Bureau.
    3. Mehmet Bac, 2007. "Optimal supervision intensity, collusion, and the organization of work," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(1), pages 317-339, February.
    4. Lazear, Edward P., 2012. "Leadership: A personnel economics approach," Labour Economics, Elsevier, vol. 19(1), pages 92-101.
    5. Torben K. Mideksa, 2021. "Leadership and Climate Policy," CESifo Working Paper Series 9054, CESifo.
    6. Fleckinger, Pierre & Martimort, David & Roux, Nicolas, 2023. "Should They Compete or Should They Cooperate? The View of Agency Theory," TSE Working Papers 23-1421, Toulouse School of Economics (TSE), revised Jan 2024.
    7. Andrea Patacconi, 2009. "Coordination and delay in hierarchies," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 190-208, March.
    8. Andrea Patacconi, 2005. "Optimal Coordination in Hierarchies," Economics Series Working Papers 238, University of Oxford, Department of Economics.
    9. Cheng Chen & Wing Suen, "undated". "Delay Cost, Knowledge Hierarchy, and Wages," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-279, Boston University - Department of Economics.
    10. Roi Zultan & Eva-Maria Steiger, 2011. "See No Evil: Information Chains and Reciprocity in Teams," Working Papers 1108, Ben-Gurion University of the Negev, Department of Economics.
    11. Steiger, Eva-Maria & Zultan, Ro'i, 2014. "See no evil: Information chains and reciprocity," Journal of Public Economics, Elsevier, vol. 109(C), pages 1-12.
    12. Garicano, Luis & Hubbard, Thomas N, 2007. "Managerial Leverage Is Limited by the Extent of the Market: Hierarchies, Specialization, and the Utilization of Lawyers' Human Capital," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 1-43, February.
    13. Eric Maskin & Yingyi Qian & Chenggang Xu, 1997. "Incentives," CEP Discussion Papers dp0371, Centre for Economic Performance, LSE.
    14. Felix Bolduan & Ivo Schedlinsky & Friedrich Sommer, 2021. "The influence of compensation interdependence on risk-taking: the role of mutual monitoring," Journal of Business Economics, Springer, vol. 91(8), pages 1125-1148, October.
    15. Mauleon, Ana & Schopohl, Simon & Vannetelbosch, Vincent, 2020. "Competition for leadership in teams," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 19-33.
    16. Robert Dur & Ola Kvaløy & Anja Schöttner, 2022. "Leadership Styles and Labor Market Conditions," Management Science, INFORMS, vol. 68(4), pages 3150-3168, April.
    17. Dunia López-Pintado & Duncan J. Watts, 2008. "Social Influence, Binary Decisions and Collective Dynamics," Rationality and Society, , vol. 20(4), pages 399-443, November.
    18. Grüner, Hans Peter, 2007. "Information Technology, Efficient Restructuring and the Productivity Puzzle," CEPR Discussion Papers 6109, C.E.P.R. Discussion Papers.
    19. Pooya Molavi & Ceyhun Eksin & Alejandro Ribeiro & Ali Jadbabaie, 2016. "Learning to Coordinate in Social Networks," Operations Research, INFORMS, vol. 64(3), pages 605-621, June.
    20. Jens Leth Hougaard & Juan D. Moreno-Ternero & Lars Peter Østerdal, 2022. "Optimal Management of Evolving Hierarchies," Management Science, INFORMS, vol. 68(8), pages 6024-6038, August.

    More about this item

    Keywords

    Organization design; Hierarchy; Leadership; Free-riding; Dynamic signaling; Lead by example;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D29 - Microeconomics - - Production and Organizations - - - Other
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L29 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:95:y:2016:i:c:p:88-106. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.