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Endogenous Effort Norms in Hierarchical Firms

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  • Jan Tichem
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    Abstract

    This paper studies how a three-layer hierarchical firm (principal-supervisor-agent) optimally creates effort norms for its employees. The key assumption is that effort norms are affected by the example of superiors. In equilibrium, norms are eroded as one moves down the hierarchy. The reason is that, because exerting effort is costly, the supervisor only partially complies with the principal's example, and thereby transmits a lower norm to the agent. The principal optimally responds to norm erosion by setting a higher example to begin with. In equilibrium, norm erosion gives rise to three inefficiencies: the principal works too hard, the supervisor's norm is too high, and the agent's norm is too low. To reduce these inefficiencies, firms should keep the extent of hierarchy to a minimum, promote employees with the strongest sensitivity to social norms, and distort man agerial spans of control.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-198/VII.

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    Date of creation: 12 Dec 2013
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    Handle: RePEc:dgr:uvatin:20130198

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    Web page: http://www.tinbergen.nl

    Related research

    Keywords: delayering; hierarchy; leading by example; norms; promotion; span of control;

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    1. George A. Akerlof & Rachel E. Kranton, 2005. "Identity and the Economics of Organizations," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 19(1), pages 9-32, Winter.
    2. Dirk Sliwka, 2007. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 999-1012, June.
    3. Stevens, Douglas E. & Thevaranjan, Alex, 2010. "A moral solution to the moral hazard problem," Accounting, Organizations and Society, Elsevier, vol. 35(1), pages 125-139, January.
    4. Bradley, Steve & Green, Colin & Leeves, Gareth, 2007. "Worker absence and shirking: Evidence from matched teacher-school data," Labour Economics, Elsevier, Elsevier, vol. 14(3), pages 319-334, June.
    5. Alexandre Mas & Enrico Moretti, 2009. "Peers at Work," American Economic Review, American Economic Association, American Economic Association, vol. 99(1), pages 112-45, March.
    6. Huck, Steffen & Kübler, Dorothea & Weibull, Jörgen, 2012. "Social norms and economic incentives in firms," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 83(2), pages 173-185.
    7. George A. Akerlof, 1978. "A theory of social custom, of which unemployment may be one consequence," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 118, Board of Governors of the Federal Reserve System (U.S.).
    8. Bruce Ian Carlin & Simon Gervais, 2009. "Work Ethic, Employment Contracts, and Firm Value," Journal of Finance, American Finance Association, American Finance Association, vol. 64(2), pages 785-821, 04.
    9. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers, Rochester, Business - Managerial Economics Research Center 90-07, Rochester, Business - Managerial Economics Research Center.
    10. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(5), pages 841-77, October.
    11. Paul Fischer & Steven Huddart, 2008. "Optimal Contracting with Endogenous Social Norms," American Economic Review, American Economic Association, American Economic Association, vol. 98(4), pages 1459-75, September.
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