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Leadership Style and Incentives

Author

Listed:
  • Julio J. Rotemberg

    (Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, E52-432, Cambridge, Massachusetts 02139)

  • Garth Saloner

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

We study the relationship between a firm's environment and its optimal leadership style. We use a model in which contracts between the firm and managers are incomplete so that providing incentives to subordinates is not straightforward. Leadership style, whether based on organizational culture or on the personality of the leader, then affects the incentive contracts that can be offered to subordinates. We show that leaders who empathize with their employees adopt a participatory style and that shareholders gain from appointing such leaders when the firm has the potential for exploiting numerous innovative ideas. By contrast, when the environment is poor in new ideas, shareholders benefit from hiring a more selfish (i.e., more profit maximizing) leader whose style is more autocratic.

Suggested Citation

  • Julio J. Rotemberg & Garth Saloner, 1993. "Leadership Style and Incentives," Management Science, INFORMS, vol. 39(11), pages 1299-1318, November.
  • Handle: RePEc:inm:ormnsc:v:39:y:1993:i:11:p:1299-1318
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    File URL: http://dx.doi.org/10.1287/mnsc.39.11.1299
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Dur, Robert & Roelfsema, Hein, 2010. "Social exchange and common agency in organizations," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(1), pages 55-63, January.
    2. Matthias Lang, 2012. "Communicating Subjective Evaluations," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2012_14, Max Planck Institute for Research on Collective Goods, revised Apr 2017.
    3. Cunyat, Antoni & Sloof, Randolph, 2011. "Employee types and endogenous organizational design: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 553-573.
    4. Gershkov, Alex & Li, Jianpei & Schweinzer, Paul, 2016. "How to share it out: The value of information in teams," Journal of Economic Theory, Elsevier, vol. 162(C), pages 261-304.
    5. Catherine Murray & Garry McDonald & Shane Cronin, 2015. "Interpreting Auckland’s volcanic governance through an institutional lens," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 75(1), pages 441-464, January.
    6. Robert Dur, 2009. "Gift Exchange in The Workplace: Money or Attention?," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 550-560, 04-05.
    7. Linus Wilson, 2014. "Managerial ownership with rent-seeking employees," Annals of Finance, Springer, vol. 10(3), pages 375-394, August.
    8. Sumon Majumdar & Sharun Mukand, 2008. "The Leader as Catalyst – on Leadership and the Mechanics of Institutional Change," CESifo Working Paper Series 2337, CESifo Group Munich.
    9. Te Bao & Yongqin Wang, 2012. "Incomplete contract, bargaining and optimal divisional structure," Journal of Economics, Springer, vol. 107(1), pages 81-96, September.
    10. Eskeland, Gunnar S., 2013. "Leadership in Climate Policy: Is there a case for Early Unilateral Unconditional Emission Reductions?," Discussion Papers 2013/6, Norwegian School of Economics, Department of Business and Management Science.
    11. Chris Klaveren & Bernard Praag & Henriette Maassen van den Brink, 2008. "A public good version of the collective household model: an empirical approach with an application to British household data," Review of Economics of the Household, Springer, pages 169-191.
    12. Berdugo, Binyamin, 2008. "What It Takes to Be a Leader: Leadership and Charisma in a Citizen-Candidate Model," MPRA Paper 11408, University Library of Munich, Germany.
    13. Kvaløy, Ola & Schöttner, Anja, 2015. "Incentives to motivate," Journal of Economic Behavior & Organization, Elsevier, vol. 116(C), pages 26-42.
    14. Liu, Jun & Pan, Jun, 2003. "Dynamic derivative strategies," Journal of Financial Economics, Elsevier, pages 401-430.
    15. Christian Zehnder & Holger Herz & Jean-Philippe Bonardi, 2016. "A Productive Clash of Cultures: Injecting Economics into Leadership Research," CESifo Working Paper Series 6175, CESifo Group Munich.
    16. Hermalin, Benjamin E., 2007. "Leading for the long term," Journal of Economic Behavior & Organization, Elsevier, vol. 62(1), pages 1-19, January.
    17. Maria Micevski, 2013. "Reciprocity, Matching, and Wage Competition," Working Paper Series of the Department of Economics, University of Konstanz 2013-25, Department of Economics, University of Konstanz.
    18. Gürerk, Özgür & Irlenbusch, Bernd & Rockenbach, Bettina, 2009. "Motivating teammates: The leader's choice between positive and negative incentives," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 591-607, August.
    19. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    20. Kamphorst, Jurjen J.A. & Swank, Otto H., 2013. "When Galatea cares about her reputation: How having faith in your workers reduces their motivation to shine," European Economic Review, Elsevier, vol. 60(C), pages 91-104.
    21. Philip J. Grossman & Mana Komai & James E. Jensen, 2015. "Leadership and gender in groups: An experiment," Canadian Journal of Economics, Canadian Economics Association, vol. 48(1), pages 368-388, February.
    22. Alex Barrachina & Víctor González-Chordá, 2016. "To report or not to report: Applying game theory to nursing error reporting," Working Papers 2016/14, Economics Department, Universitat Jaume I, Castellón (Spain).
    23. Mana Komai & Philip J. Grossman & Evelyne Benie, 2017. "Leadership and the effective choice of information regime," Theory and Decision, Springer, pages 117-129.
    24. Steven N. Kaplan & Morten Sorensen, 2017. "Are CEOs Different? Characteristics of Top Managers," NBER Working Papers 23832, National Bureau of Economic Research, Inc.
    25. Lazear, Edward P., 2012. "Leadership: A personnel economics approach," Labour Economics, Elsevier, vol. 19(1), pages 92-101.

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