Abstract

We analyze a model of hierarchies in organizations where neither decisions themselves nor the delegation of decisions are contractible, and where power-hungry agents derive a private benefit from making decisions. Agents are probabilistically informed about the optimal action and maximize their private benefits as well as the payoffs of the activities assigned to them. Lower-level managers are more specialized and therefore internalize fewer externalities.

We study delegation decisions and optimal organizational design in this environment. A designer may remove intermediate layers of the hierarchy (eliminate middle managers) or de-integrate an organization by removing top layers (eliminate top managers). We show that stronger preferences for power result in smaller, more de-integrated hierarchies. Our key insight is that hoarding of decision rights is especially severe at the top of the hierarchy. As a result, even a top manager who is a better stand-alone decision-maker than the middle and lower-level managers below him, may add negative value to a hierarchy. In contrast to standard delegation models, the uncertainty surrounding decisions and the magnitude of incentive conflicts of lower-level managers have a non-monotonic impact on the value of top and middle managers.

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Citation

Dessein, Wouter, and Richard Holden. "Organizations with Power-Hungry Agents." Columbia Business School, July 22, 2017.

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