Leadership Styles and Labor-Market Conditions

51 Pages Posted: 11 Feb 2021

See all articles by Robert Dur

Robert Dur

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Ola Kvaloy

University of Stavanger

Anja Schöttner

Humboldt University of Berlin - School of Business and Economics

Date Written: February 2021

Abstract

Why do some leaders use praise as a means to motivate workers, while other leaders use social punishment? This paper develops a simple economic model to examine how leadership styles depend on the prevailing labor-market conditions for workers. We show that the existence of a binding wage floor for workers (e.g., due to trade union wage bargaining, minimum-wage legislation, or limited-liability protection) can make it attractive for firms to hire a leader who makes use of social punishment. While the use of social punishments generally is socially inefficient, it lessens the need for high bonus pay, which allows the firm to extract rents from the worker. In contrast, firms hire leaders who provide praise to workers only if it is socially efficient to do so. Credible use of leadership styles requires either repeated interaction or a leader with the right social preferences. In a single-period setting, only moderately altruistic leaders use praise as a motivation tool, whereas only moderately spiteful leaders use social punishment. Lastly, we show that when the leaders' and workers' reservation utilities give rise to a bigger income gap between leaders and workers, attracting spiteful leaders becomes relatively less costly and unfriendly leadership becomes more prevalent.

JEL Classification: M5

Suggested Citation

Dur, Robert and Kvaloy, Ola and Schöttner, Anja, Leadership Styles and Labor-Market Conditions (February 2021). CEPR Discussion Paper No. DP15790, Available at SSRN: https://ssrn.com/abstract=3784029

Robert Dur (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

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HOME PAGE: http://people.few.eur.nl/dur

Tinbergen Institute

Amsterdam/Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ola Kvaloy

University of Stavanger ( email )

N-4036 Stavanger
Norway

Anja Schöttner

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

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