Working Paper: CEPR ID: DP13526
Authors: Wouter Dessein; Richard Holden
Abstract: We analyze a model of hierarchies in organizations where neither decisions themselves nor the delegation of decisions are contractible, and where power-hungry agents derive a private benefit from making decisions. Two distinct agency problems arise and interact: Subordinates take 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 de-integrate an organization by removing top layers (eliminate top managers). We show that stronger preferences for power result in smaller, more de-integrated hierarchies. Our key insight is that hoarding of decision rights is especially severe at the top of the hierarchy.
Keywords: hierarchies; preferences for power; delegation; organization design
JEL Codes: D2; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stronger preferences for power (D01) | smaller, more deintegrated hierarchies (L22) |
| hoarding of decision rights (D70) | inefficiencies in decision-making (D91) |
| preferences for power (D72) | removal of top hierarchical layers (L22) |