40 Pages Posted: 28 Jun 2010 Last revised: 7 Dec 2011
Date Written: November 13, 2011
I analyze the impact of managerial involvement and the allocation of authority on employee initiative in a setting where both a manager and an employee can come up with new ideas for implementation. Extending the analysis of Aghion and Tirole (1997), the model introduces two effects that are absent in their framework and examines their implications for both the optimal level of managerial involvement and the allocation of authority. These effects are the competition effect, whereby increased effort by the manager can increase the effort of the employee when the manager retains formal authority, and the alignment effect, whereby the types of ideas that are generated in equilibrium are dependent on the allocation of authority. The implications of these effects are two-fold. First, both effects decrease the value of formal delegation and in the present setting are so strong that the manager rarely wants to formally delegate authority to the agent. Second, conditional on retaining formal authority, the manager will choose one of two strategies. To utilize the competition effect and to maximize employee initiative, the manager can choose a strategy of active but limited involvement in the idea generation stage. Too much involvement will crowd out employee initiative, while too little involvement (like formal delegation) will allow the employee to pursue his pet projects at the detriment of overall organizational goals. Alternatively, if the cost of employee initiative is too large in terms of the compromised quality of managerial ideas, the manager prefers to work alone. The worst possible outcome arises when the manager is involved enough to demotivate the employee but not active enough to generate strong alternatives herself.
Keywords: formal and real authority, employee initiative, innovation, contests
JEL Classification: D2, D8, L2
Suggested Citation: Suggested Citation