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Economics of leadership and hierarchy

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  • 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
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    References listed on IDEAS

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    1. repec:oup:jleorg:v:33:y:2017:i:3:p:475-506. is not listed on IDEAS

    More about this item

    Keywords

    Organization design; Hierarchy; Leadership; Free-riding; Dynamic signaling; Lead by example;

    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

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