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Title: Organizations with Power-Hungry Agents

Author(s): Wouter Dessein and Richard Holden

Publication Date: February 2019

Keyword(s): delegation, Hierarchies, Organization Design and Preferences for Power

Programme Area(s): Industrial Organization

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. Two distinct agency problems arise and interact: Subordinates take more biased decisions (which favors adding more hierarchical layers), but uninformed superiors may fail to delegate (which favors removing layers). 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.

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Bibliographic Reference

Dessein, W and Holden, R. 2019. 'Organizations with Power-Hungry Agents'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13526