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Organizations with Power-Hungry Agents

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  • Wouter Dessein
  • Richard Holden

Abstract

We analyze a model of hierarchies in organizations in which neither decisions nor the delegation of decisions is contractible and in which power-hungry agents derive a private benefit from making decisions. Two distinct agency problems arise and interact: subordinates make more biased decisions (which favors adding more hierarchical layers), but uninformed superiors may fail to delegate (which favors removing layers). A designer may remove intermediate layers of the hierarchy (eliminate middle managers) or flatten an organization by removing top layers (eliminate top managers). We show that stronger preferences for power result in smaller, less-integrated hierarchies. Our key insight is that hoarding of decision rights is especially severe at the top of the hierarchy.

Suggested Citation

  • Wouter Dessein & Richard Holden, 2022. "Organizations with Power-Hungry Agents," Journal of Law and Economics, University of Chicago Press, vol. 65(S1), pages 263-291.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/718852
    DOI: 10.1086/718852
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    Cited by:

    1. Victor Klockmann & Alicia von Schenk & Ferdinand von Siemens, 2021. "Division of Labor and the Organization of Knowledge in Production: A Laboratory Experiment," CESifo Working Paper Series 8822, CESifo.
    2. Klockmann, Victor & von Schenk, Alicia & von Siemens, Ferdinand A., 2021. "Division of labor and the organization of knowledge in production: A laboratory experiment," Games and Economic Behavior, Elsevier, vol. 130(C), pages 196-210.
    3. Dell'Era, Michele, 2019. "Talking to Influence and the Consulting Paradox," MPRA Paper 93803, University Library of Munich, Germany.
    4. Alessandro De Chiara & Florian Engl & Holger Herz & Ester Manna, 2022. "Control Aversion in Hierarchies," CESifo Working Paper Series 9779, CESifo.
    5. Pikulina, Elena S. & Tergiman, Chloe, 2020. "Preferences for power," Journal of Public Economics, Elsevier, vol. 185(C).
    6. Cameron Gordon, 2022. "The Information Bottleneck Principle in Corporate Hierarchies," Papers 2210.14861, arXiv.org.

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    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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