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Managing Employees 'Insides' to Remedy Agency Problems? A Model of Transformational Leadership

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  • Donze, Jocelyn
  • Simard-Casanova, Olivier

Abstract

We consider a leader who can choose between a transactional or a transformational style of leadership to motivate a team of followers, in presence of moral hazard and free riding. Transformational leadership extends transactional leadership by allowing the leader to deliver a motivational message in addition to standard monetary incentives. When followers adhere to the leader's message, they get more motivated and exert more effort. We show that there is a complementary between monetary incentives and the motivational message. Furthermore followers are better off under transformational leadership. We also show that when the team size increases, transformational leadership - even if it comes at a fixed implementation cost - becomes less and less profitable for the leader compared to transactional leadership, at least when the size increase does not reinforce too much the social incentives to adhere to the leader's vision. When the size increase makes social incentives sufficiently stronger, transformational leadership regains interest and can even remedy the free-riding and moral hazard problems. Our results are in line with the empirical literature on leadership.

Suggested Citation

  • Donze, Jocelyn & Simard-Casanova, Olivier, 2018. "Managing Employees 'Insides' to Remedy Agency Problems? A Model of Transformational Leadership," MPRA Paper 94459, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:94459
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    References listed on IDEAS

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    More about this item

    Keywords

    leadership; teams; agency problems; incentives; motivational message.;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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