Leadership and Organizational Hierarchies
55 Pages Posted: 1 Apr 2020
Date Written: February 2020
Organizations are hierarchies with leaders at the top. Why do we have leaders instead of an algorithm making decisions? The theory of the firm recognizes advantages to centralizing authority. However, the organizational benefits of hierarchy have not been clearly separated from the specific contributions of leaders. We start from the premise that all contracts are incomplete. Not all contingencies can be specified ex-ante. Leadership is the ability to successfully manage principal/agent and coordination costs. The balance between these two types of costs depends on the purpose of the organization. Leadership also entails moving policies/strategies closer to the purpose of the organization. We develop hypotheses about the role of leadership across organizations. We test our hypotheses with data on Soccer Managers in Brazil, NFL coaches, and Deans of Business and Law Schools. Consistent with our hypotheses we find that leadership and changing leaders matters more in sports teams than for Deans.
Keywords: Leadership, Organizational Economics, Hierarchies, Delegation, Decision Rights, Organizations, Personnel Economics, Firm Structure
JEL Classification: M5, M12, L22
Suggested Citation: Suggested Citation