Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits

47 Pages Posted: 25 May 2014 Last revised: 24 Aug 2015

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute; Canadian Institute for Advanced Research (CIFAR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2015

Abstract

How can a principal (employer or voter) induce an agent (worker or politician) to choose the 'right' actions if risky actions reveal the agent's decision-making competence and only dismissal can be used as an incentive instrument? The principal wishes to replace incompetent agents, but dismissal-fear can cause the agent to choose excessively safe actions that are uninformative. We first show that if the principal can commit to a replacement strategy in advance, then optimal mechanisms involve either (i) a probationary period and then indefinite tenure, or (ii) a dismissal strategy that replaces incompetent agents but also randomly replaces agents who take safe actions even if they are thought to be competent and may be taking an appropriate action. We characterize when each of these mechanisms is optimal. If the principal (e.g., a set of voters) regularly chooses whether to replace a leader, then whether or not efficiency is possible depends on the class of equilibria. Commitment-like behavior and approximate efficiency can be enforced in equilibria that use grim trigger-like strategies off-path, but efficiency is not possible in equilibria in which a new leader always provides a positive expected value, regardless of how competent a current leader is thought to be, and incentives can be improved by imposing term limits on leaders.

Keywords: Information, tenure, dismissal, replacement, elections, term limits, leadership, discretion, principal-agent, agency

JEL Classification: D72, D82, D86, M12, C72

Suggested Citation

Aghion, Philippe and Jackson, Matthew O., Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits (March 1, 2015). Available at SSRN: https://ssrn.com/abstract=2441421 or http://dx.doi.org/10.2139/ssrn.2441421

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matthew O. Jackson (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)

HOME PAGE: http://www.stanford.edu/~jacksonm

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Canadian Institute for Advanced Research (CIFAR) ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

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