Why Do We Have Managers?

Abstract

Economic actors have to make lots of decisions, and the paper is based on the premise that it takes time to be involved in any one of them. Attempts to economize on decision-making time imply that groups of peers may abdicate decision-making authority to a small set of managers even though this means that the information and preferences of the uninvolved players are neglected. We find that players are more likely to be managers if they have better information and more representative, but stronger, preferences. The possibility of ex post intervention may force managers to take the preferences of others into account and can lead to smaller management teams. On the other hand, the threat of intervention may reduce managers' incentives to use their private information. We proceed to suggest that the argument may explain employees' willingness to let their bosses decide, and thus throw some light on the theory of the firm.

Keywords: Firms, managers, renegotiation

JEL Classification: D2, L2