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

41 Pages Posted: 24 Jul 2014

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: July 2014

Abstract

In this paper we analyze the problem of whether and/or when to replace a leader (agent) when no monetary rewards are available, and it is the leader's competence rather than effort that is being evaluated. The only decisions that the leader takes over time are whether to undertake risky but potentially high payoff projects, the choice of which can reveal the leader's competency. If the value of foregone projects are observed, then the probability that a leader is replaced is bell-shaped and saw-toothed over time. If the value of foregone projects are not observed, and the leader's competency is only indirectly inferrable through the success or failure of projects that the leader undertakes, then the incentives of the leader depend on the replacement strategy. If the principal can commit to a replacement strategy in advance, then we show that (approximately) optimal mechanisms either involve a probationary period and then indefinite tenure, or else a random dismissal strategy. If instead commitment is impossible, and for instance voters regularly choose whether to replace the leader, then there are poor incentives and inefficiently low payoffs, even below that of simply replacing the leader in every period. Incentives can be improved via term limits.

Suggested Citation

Aghion, Philippe and Jackson, Matthew O., Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits (July 2014). NBER Working Paper No. w20301. Available at SSRN: https://ssrn.com/abstract=2471194

Philippe Aghion (Contact Author)

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

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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