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ALFRED
P.
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
Leadership Style and Incentives
Julio
J.
Rotemberg
Garth Saloner
WP#
3250-91-EFA
September 1990
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
Leadership Style and Incentives
Rotemberg
Garth Saloner
Julio
WP#
©
J.
September 1990
3250-91-EFA
1991 Massachusetts Institute of Technology
Sloan School of Management
Massachusetts Institute of Technology
50 Memorial Drive
02139
Cambridge,
MA
Acknowled gement
The authors are respectively Professor of Applied Economics at MITs Sloan School
of Management and Professor of Strategic Management and Economics and BP
Amenca Faculty Fellow at Stanford University's Graduate School of Business. We
wish to thank Tom Allen for help as well as the National Science Foundation and
the International Financial Services Research Center at MIT for support.
Abstract
We
study the relationship between a firm's environment and
We
present conditions under which firms benefit from having autocratic leadership and
its
optimal leadership
conditions under which they benefit from a more participatory style.
model
in
which contracts between the firm (or
that providing incentives to subordinates
is
We
CEO) and managers
not straightforward.
style.
use an economic
are incomplete so
CEO's with
different
preferences (or personalities) adopt different leadership styles and these styles in turn
have an
effect
on the incentive contracts that can be offered to subordinates.
that shareholders gain from appointing a
firm has the potential for exploiting
environment
more
is
poor
autocratic.
in
new
CEO who
We show
adopts a participatory style when the
numerous innovative
ideas, shareholders benefit
ideas.
By
from hiring a
contrast,
CEO
when
whose
the
style is
Students of business organizations have long recognized that the heads of different companies
exercise their authority in different ways.
Some
leaders are quite autocratic; they seek and receive
only minimal advice from their subordinates. Other leaders are
within their organizations.
Some
more democratic and seek consensus
chief executive officers issue directives concerning
of operation. Others suggest only broad principles
minute details
and give considerable autonomy to those below
them.
In this
on firm
paper we provide an economic model
profitability.
We show
in
which leadership
style has
an important
effect
that senior management's style can alter the incentives that can be
provided for subordinates to ferret out profitable opportunities for the firm. The resulting theory
has predictions for the circumstances where shareholders benefit from having either autocratic or
democratic CEO's.
We
consider a setting in which firms undertake investment projects which are sequential in
that the firm has the option of shutting
variety of business settings:
down
projects mid-way.
This
is
Almost any business venture goes through a
appropriate to a wide
variety of stages
from
conceptualization to eventual adoption and implementation, and a venture can be cut short at any
stage by withdrawing the needed additional financing.
As the
shown,
in
literature on sequential investment initiated by Roberts
and Weitzman (1981) has
such a setting the optimal investment strategy for the firm involves experimenting with
the early stages of
many
projects.
the project
Indeed the firm should initiate some projects for which the
funded to completion exceeds the corresponding expected revenue.
expected cost
if
The reason
that the option to shut
is
if
down
projects
is
valuable.
The
challenge to senior
management
for their subordinates to think
incentive
interferes
such a setting
is
to provide the appropriate incentives
up and undertake these potentially profitable
scheme that the firm can
to fruition.
in
offer
is
to reward employees
projects.
whose projects are
carried through
Here, however, the valuable option that the firm has to close projects
with
their projects
mid-way reduces the incentive
the subordinates to generate potentially profitable ventures in the
Since the leadership style of the senior
management
about whether to continue projects already underway,
its
down mid-way
to provide the appropriate incentives to its managers. In particular, the
its ability
knowledge that the senior management may abort
incentives for
One simple
We
workers.
it
is
first
for
place.
likely to affect
how
decisions are
made
also affects the ability of the firm to provide
investigate the effect that autocratic
and democratic leadership
have on the ability of the firm to provide incentives and study the circumstances
in
which
styles
different
leadership styles are optimal.
Our main
could exploit
-
finding
is
and where
to ferret those ideas out
when
the environment
The
that in environments which are rich in potential
literature
-
it is
new
rich in
ideas, autocratic
on leadership styles has
Tannenbaum and Warren
ideas which the firm
correspondingly more important to provide incentives to employees
the democratic leadership style
is less
new
is
most
On
attractive.
the other hand,
management may be more
classified these styles in
numerous
profitable.
related ways. Robert
H. Schmidt (1958), see leadership behavior as falling in a continuum be-
tween extreme "boss- centered" leadership and extreme "subordinate-centered" leadership. While
the former managers
make
subordinate be allowed to
decisions on their
make
own and announce them
the latter insist that each
decisions within broad limits imposed by his/her superior.
Likert (1967) classifies organizations as adopting 4 "systems", labelled
systems
differ
along a variety of characteristics. System
1
is
more autocratic
through
1
in that
are consulted less than systems 2, 3 and 4 with system 4 being the one with the
participation.
Managers are increasingly
superiors) as one goes from system
Without
offering as
They compare Harold
Matsushita.
complete a
S.
1
friendlier (and
subordinates grow
4.
These
subordinates
most subordinate
less afraid of their
to 4.
classification, Pascale
and Athos (1981) stress similar contrasts.
Geneen who managed ITT from 1960 to 1979 to the management
Geneen emphasized "unshakeable
facts"
and obtained these "unshakeable
of
facts" by
promoting confrontation between
famous
for his pressure-cooker
line
managers and those
charge of staff functions. Geneen
in
meetings where managers has to defend their results
To some
aggressive questioning by Geneen and other managers.
is
in the face ot
extent, these meetings provided
subordinates with the ability to express their opinions. However, the unshakeable facts were often
then used to remove employees whose performance was
The management
style at
less
than wholly satisfactory.
Matsushita was much more participatory. Decision making at Mat-
sushita involved the seeking of consensus and not the unilateral decisions from the
and perhaps as a
tices lifetime
training
The
that the
its
result,
CEO.
In addition,
managerial turnover was much lower since that Japanese company prac-
employment.
Finally, the
company spent considerably more
resources developing and
employees.
early students of leadership style such as Likert and
more
participatory leadership style
is
Tannenbaum and Schmidt
suggest
always better. The alternative view that the optimal
depends on the environment has gained wide currency since the work of Paul R. Lawrence
style
and Jay W. Lorsch (1967) and Charles Perrow (1970). These authors focus mostly on the
effect of
the predictability of tasks. Lawrence and Lorsch put particular stress on the fact that production
divisions face relatively predictable tasks while research divisions do not with sales divisions falling
some
place in the middle. They find that those divisions where tasks are
in three respects.
is
The
first is
that the structure
is
more predictable
more formal, there are more
that the planning horizons are shorter and the final one
is
that people are
rules.
differ
The second
more concerned with
getting tasks done than with their interpersonal relations.
Perrow (1970) too focuses on the
that the ability to routinize tasks
that,
when such
the firm's style
One
routinization
is
is
is
effect of the extent to
which tasks are routine. He argues
desirable for firms (because
it
stabilizes their earnings)
possible, bureaucratization ensues as well.
When
it is
and
impossible,
by necessity more participatory.
issue that
is left
somewhat open by
this research
on the personality of the leader or whether any
assume the former. This
is
the following example (p.
CEO
is
whether the management style depends
can pick any leadership
style. In this
supported by the observations of Desmond Graves (1986)
123):
"A
likable but indecisive leader,
paper we
who
who coordinated but
interfere with the efforts of able subordinates, provided the culture of
reports
did not
expansionism necessary
for a
business to
make
its
mark
in the
marketplace.
He was succeeded by one
of those subordinates
consolidated the position and quadrupled profitability of the organization in six years..."
characteristics of the leader then permeate the whole organizations' culture,
about what behavior
is
appropriate and what behavior
is
i.e., its
who
These
basic beliefs
deviant.
Fiedler (1965) also gives great weight to the psychological characteristics of the leader.
shows that leaders who have a more participatitive
workers.
He regards esteem
for
style also have higher
co-workers as a personality
trait.
esteem
He concludes
different leadership styles are successful in different settings, firms ought to place
He
for their co-
that, because
managers using
information on the managers' tendency to esteem their co-workers. While he also studies the effect
on the
of the groups' task
ideal personality of the leader, Fiedler
emphasizes that the leader's ideal
type depends on the psychological relationship between the leader and his subordinates
whether the subordinates
Our paper
is
like
work based on Coase (1937) which argues that firms
arise as a partial solution to the intrinsic incompleteness of contracts
seen as creating rights of control and those
who
cannot be contractually stipulated. This solution
are generally not sufficient to obtain the
firms do better
when, as
CEO's who can be
proposal
is
if
is
is
parties.
make those
outcome that
is
proposed by Shleifer and
is
Firms are
decisions that
possible with complete contracts.
the universe of available contracts were expanded.
difference
1
generally only partial in that control structures
Summers
that "fair-mindedness"
is
A
better
For this reason
(1987), they hire "fair-minded"
trusted to follow through on implicit promises. Shleifer and
The main
CEO's whereas we
between
are given these rights
similar to ours in that personal characteristics of the
are incomplete.
on
the leader).
also closely related to the
outcome would be possible
(i.e.,
CEO
Summers' (1987)
matter because contracts
a desirable characteristic for
focus on personal characteristics that are appropriate in
all
some contexts and
inappropriate in others.
The next
section presents our basic model of sequential research and implementation. Section
2 analyzes the
model and compares the outcome under two extreme types of CEO. Section
formulates and solves the problem of maximizing the
environment of the enterprise. Section
1
See Holm»trom and Tirole (1989) for a survey
fit
between the
4 concludes the paper.
CEO
3
personality and the
The Model
1.
The
if
situation
successfully
for
we examine
one
in
which a manager can expend
implemented, might improve firm
an improvement
in either
method to reduce
of a
is
their potential for
This
profitability.
product design or delivery to the
costs, or the
effort developing
might
effort
an idea which,
entail the search
customer, the investigation
final
development of a new product.
Firms obviously
differ in
undertaking such profit-enhancing ventures so that only some managers are
in
a position to pursue them. For example, in mature industries with stable markets and established
technologies such opportunities are likely to be rarer than in emerging industries.
We
have
in
mind product enhancements
invests a great deal of personal time
oping a proposal for
its
and
that go through two stages. In the
first,
effort in researching the profit-enhancing idea
the
manager
and devel-
implementation. The second stage consists of the implementation
which may be carried out by the manager or by others. Importantly, however, the
to whether or not to
the
implement the project
is
in
the hands of a
more
senior
itself,
final decision as
manager
whom we
call
CEO.
The
fruits of the
manager's
to be reaped by the firm
that the
if it
efforts are
to be stochastic.
That
eventually implements a manager's project
manager must decide whether
will look better
assumed
is,
is
the potential profit
uncertain at the time
or not to put his effort into the project. While
than others, the exact profitability of the venture
is
unknown
some
projects
until the project has
been researched by the manager.
Notation and Timing
1.1.
It is
useful to think of events as unfolding over three periods. Managerial effort to develop the
idea takes place in the
first
period. In the second period, the idea
is
adopted
(or
implemented). This
implementation usually requires that the firm spend additional resources on the project. Finally,
in the third period, the
of an
implemented project bears
The random
variable
G
denotes the profit
implemented project from the second period on.
Ignoring discounting,
G
equals the increased revenue (or reduced cost) in the third period
minus the implementation costs incurred
variable
It is
fruit.
G
in period two.
We
let
the realization
G
of the
random
have a cumulative distribution function F(G) and corresponding density function f{G).
important to stress that the realizations of
G
5
can be negative.
A
negative
G
simply means
The
that the costs of implementing the idea exceed the benefits.
profit opportunities
terms of the
greater
during the
first
G
=
period: e
1
important
to
become
period,
first
the potential gain from the project
CEO
we assume
For simplicity
G
G
becomes known, but the
G
e
,
of
what
G
the
G
becomes known
results
=
G
if
=
1),
It is
not
end of the
at the
it
first
will be.
can be derived by having manager and
will be.
must then decide whether or not
is
both the manager and the CEO.
to
I
/:
implement the project during the second period.
to
=
1 if a project
not. Finally, at the end of the second period, the profit
implemented
e
the manager has researched the project (c
if
becomes known
denote the implementation decision by
1.2.
i.e.,
effort c to
and manager simply have a more accurate estimate of what
obtain an estimate, say
CEO
manager must devote
available, the
our analysis whether the actual value of
for
period or whether the
We
negative,
is
the manager does explore the idea (devotes effort) and
if
At the end of the
he does not.
The
G
in
F(0).
is
For the project with payoff
CEO
presents, the higher the likelihood that
it
environment
less "rich" the
is
implemented and /
from any project which
is
=
if it is
researched and
earned by the firm.
Preferences and Profits
We assume
break
down
that the manager's utility depends only on his effort e and on his income.
the manager's compensation into the wage, w, for a
opportunity of undertaking a profit-enhancing project and
tasks,
and the "incentive" payment k which
we do
not
let
is
effort
is
It will
e.
As we
discuss
the
only his "usual"
more
fully
below,
depend instead on whether the project to
actually implemented.
typical in principal-agent models,
below which the manager
who thus performs
tied to the effort
k depend on the actual effort made.
which the employee devoted
As
is
manager who does not have
We
will refuse to
we suppose
work. This
that there
minimum
is
level of
some minimum
w
for
level of
w
performing "normal"
tasks can be thought of as being determined in a competitive market for managerial talent.
We
assume that the manager's
in excess of w)
3
utility is linear in k (so
and that exerting the
effort e gives
him
that he
disutility d.
3
is
risk-neutral over income
Since
we
are interested in
we could also have let the manager obtain some direct utility from the implemenThe improvement in the manager's prospects in the external labor market following implementation of his
idea could generate some direct utility of this sort. As long as the expected value of direct utility from implementation does
At the
cost of complicating the analysis,
tation of hia idea.
not exceed the disutility of effort d this modification has no substantive effect* on the conclusions.
3
Letting the manager's utility be linear in income beyond w implies a form of risk aversion since the worker does not accept
the change in the manager's utility from undertaking projects, we normalize his utility so that his
when he
utility
receives
u; is
can simply be written as u(k,
The
model
we
in
CEO
posit instead that the
=
e)
focus of our analysis
which the
Then the manager's expected
zero.
E(k)
maximizes
profits, the
CEO
CEO
is
CEO
a function of
the expectation of
CEO.
and
jfc
c
it.
microeconomic
In a traditional
would seek to maximize I(G
—
k).
However
concerned not only about firm profitability but also about the
is
well-being of the manager. In particular,
decision, the
ed where E(k)
the utility function of the
is
CEO
—
utility as
we suppose
that at the time he
places weight 9 on profits and weight
1
—
9
makes
his
on the manager's
implementation
Thus the
utility.
seeks to maximize:
I\{l
Note that any
decision
CEO's
is
effort that
-
9){G
-
+
k)
9k\.
(1)
might have been expended by the manager prior to the implementation
"water under the bridge" and therefore the disutility of that effort doesn't enter the
preferences.
The
variable 9
is
the key variable in our analysis.
"personality type" of the
CEO. A
the "bottom line" and not at
a 9 that
is
equal to
1, in
to
1
the
with a
about the
all
9 of
is
utility of the
can be though of as representing the
a profit-maximizer: he cares only about
manager who works
contrast, cares only about the welfare of his
oblivious to the "bottom line"
increases from
CEO
It
Values of 9 between
.
CEO's concern
and
1
for
him.
manager and
A CEO
completely
is
represent intermediate cases:
for profit vis-a-vis his concern for his
with
As
9
manager's welfare
declines.
We
CEO
term a
CEO
for
whom
with a "participatory"
9
=
an "autocratic" manager, and one for
The motivation
style.
for this
implementation decision generally being taken by the
CEO
the manager.
if
be
If
the manager's compensation
in equilibrium, the
manager
will
is
higher
is
the following.
is 9,
the
more the
account. Hence the term "participatory" to describe a
the project
CEO
CEO
We
9
=
1
a
think of the
with some degree of consultation with
is
implemented, as
have an incentive to try to convince the
should be implemented. The higher
whom
CEO
it
often will
that the project
takes the manager's preferences into
with a high 9 By contrast a
CEO
with
a wage below tu. This form of risk aversion is not, per ae central to our analysis. What is central is that the employee remain an
employee and not become the owner of the enterprise. In other words, we cannot let the employee become the residual claimant
on all the firm's cash flows. It might be thought that a risk neutral employee would be willing to become the owner. However,
this becomes impossible once it is recognired that a company has many interdependent employees and that they cannot each
become the
residual claimant of the entire firm.
a 9
=
does not take the interests or concerns of the manager into account and need not consult
with him. Hence the label "autocratic".
In general one
might expect that the overall
CEO
by the extent to which the
about his manager's welfare
efficiency of the firm
would also be affected
concerned with his manager's welfare.
is
will generally indulge his
manager's desire
A CEO who
cares
and
for perquisites
for
nonessential equipment and personnel. Since shareholders are probably incapable of stopping
of these payments,
we expect
manager
autocratic
to be
more
efficient.
what they would be under profit-maximization by C(9)
costs over
In the "background"
who have
are the firm's shareholders
4
We
(so that
all
denote the increase
C(0)
=
0).
in
5
CEO.
the authority to hire the
Since they are removed from the day to day operations of the firm, they are assumed to be solely
interested in profit-maximization and to be unconcerned about the manager's utility as long as he
is
compensated
sufficiently to induce
him
to
do
CEO
Thus the
his job.
the intermediary between
is
the two sets of stakeholders, the manager and the shareholders, and his preferences play a role in
determining the sharing of the profits between them.
1.3.
Informational Assumptions and Contractibility
An important
distinction in our
model
compensation directly on the manager's
the case where the
CEO
can do
complete contracts possible
is
complete contracts based on
e
it is
whether or not the
effort.
also that
it
is
that e be verifiable.
It
we term
can be replicated under somewhat weaker conditions. In particular,
G
is
verifiable.
In
is
observable by the
for enforcing the
CEO,
but
compensation agreement
an extreme case this enforcement body might be the Courts
verifiability refers to the ability to establish the facts before
is
6
turns out, however, that the outcome with
can be established by the body responsible
however, the enforcement
able to base the manager's
Consistent with the contracting literature
means not only that the relevant information
between manager and CEO.
which case
CEO
"complete contracts" case. One simple condition that makes
possible to obtain this outcome as long as
"Verifiability"
a
so, the
is
performed by other employees.
4
A countervailing force exi»t» when manager and CEO do not observe
CEO who maximizes profits will tend to spend too much in finding out
If
the
CEO
a judge or jury.
is
8
often,
observed to have reneged
the actual value of G in the second period. Then,
the true value of G. He may, for example, have to
appoint separate "task force" to perform this function.
6
Little hinges on this assumption, and indeed the opposite assumption (that the participatory manager
simply involves reinterpreting C(6) as a cost saving, rather than a cost increase.
'See Holmstrom and Tirole (1989).
More
in
is
more
efficient)
on an implicit agreement with the manager
when
it is
example by withholding payment
(for
of a "bonus"
understood by the employees that the circumstances warrant a bonus being paid)
has deleterious effects on his reputation for "fair dealing"
.
this
In this context, verifiability refers to
the manager's ability to convince the other employees in the firm that he did indeed carry out the
required effort.
Typically e
is
not verifiable because
really putting in the necessary effort
the agency literature
other than the
The
it is
manager
fact that e
is
typically
it is
difficult to distinguish cases in
and when he
is
assumed that the
simply going through the motions. Indeed,
effort
manager
is
positive
i.e.,
manager
This
is
is
not observable does not,
in
and of
itself,
to be risk-neutral, he
and receiving a
larger
is
indifferent
indifferent
d.
On
and therefore he
In practice,
G
is
verifiable. Since
between receiving a direct payment d
average
as
is
on the
G
is
happy
<j>G
at the beginning of the first period
G
turns out to be
partial audits
many
is
<f>
=
d/E(G).
simply E(<f>G)
=
a perfect indicator of whether or not the manager exerted the
to have his
compensation based indirectly on the outcome of
his
effort itself.
however, even
G
is likely
to be very difficult to verify. Accounting profit figures are
and other cost items. This manipulation
extremely costly to detect. Moreover, this form of manipulation
that
if
payment (which depends on G) when
subject to manipulation through the allocation of overhead
is
be possible
between receiving d always and receiving a payment 4>G where
because the expected value of
effort as directly
is
still
prevent a complete contract from
only in those cases where he in fact comes up with a profitable proposal. Formally, the
E(kG/E(G)) =
effort
in
himself.
assumed
for exerting effort
is
cannot be precisely observed by anyone
being written in our setting. Indeed a complete contract will
the
which the manager
and imposing big
fines
is
not easy to reduce by making
on firms found to have manipulated their books. The reason
of these manipulations are conceivably justified so that
it is
hard to decide, even ex
post the correct procedure for determining costs.
In
is
any event the principal force that ensures that managers receive their incentive payments
probably reputational.
When
those that work with him.
firm treats
its
employee
a particular manager has been successful, this becomes
These also learn whether that employee
unfairly, this peer
group
lets
is
known
treated "unfairly"
.
If
to
the
others know. This loss of reputation, in turn,
makes
G
on
it
is
harder for the firm to attract new employees. Making payments to the employee depend
not possible
if
other employees do not readily observe
G
.
It is
for this reason that
we ignore
such contracts.
What
peers can easily observe
is
whether the manager's project
determine this because their contact with the manager
project so the firm
elsewhere.
is
this reason that
relatively easy to enforce.
we
variable
7
The
CEO
outside enforcement party
difference
manipulable only by the agent who
on the decision of the principal who
of the
is
is
the promise of
in
is
making the
is
paying the agent.
implemented, a contract
some payment k
this contract,
evidence on this
effort.
It is
is
Among
if
the project
unfortunately sparse.
the engineers,
scientists
67%
It is
for
in the traditional
depend on an a variable
Here, the variable also depends
for this reason that the personality
the opportunity to help their
company
the latter very important.
By
made
is
whether
incomplete contracts setting consists only of
their projects implemented. Empir-
Some support comes from
in the private sector
it is
increase
the study by Ritti (1968)
about their goals and
aspi-
very important to work on problems that have
company and 69% say that
contrast,
contingent
implemented. 8
is
working
say that
practical applications important to their
deem
in this
managers ought to be keen on having
which he asks engineers and
rations.
even needed.
plays such a crucial role in our analysis.
or not the project
ical
is
his ideas are
that, in the traditional literature, the
Since the only action on which the manager's compensation can be
Given
obtained the idea
manager depend on whether
to the
In that literature, as in our model, contracts
imperfectly related to effort.
is
it
one fundamental respect from those contracts studied
differ in
principal-agent literature.
is
No
basic content of the
focus on these contracts.
These contracts
which
them know the
unable to implement the project and pretend that
Thus contracts that make the payment
implemented are
lets
implemented. They can
is
its profits.
88%
Among
it is
very important to have
research scientists, only
28%
of the scientists view publication in technical
journals as very important. 9
7
See, for instance,
Holmstrom
(1979).
not implemented, the manager simply earns his reservation wage ui. Paying the employee more would be
wasteful. Paying him less is impossible given our specification of employee tastes Our results would still go through if there
was no minimum payment but the k has to be thought of as the difference between the payment if the project is implemented
and the payments if it is not.
*If the idea
if
"See also Badawy (1971).
10
Ritti (1968) views these differences as matters of basic personality.
and one that
is
consistent with our model,
possible to provide
cations to their company.
By
do
different interpretation,
uiat because engineers work on applied problems
them with compensation schemes that depend on the
their projects. Accordingly engineers
for the
is
A
in fact care that their
work has valuable practical
impli-
contrast, scientists involved in basic research cannot be compensated
more concerned with outside recognition than with enhancing the
the manager.
implementation of
final
implementation of their ideas. Accordingly, given the incentives they
The contract
it is
that specifies the contingent
payment k
is
As discussed above, the "contract" may be
on enforcement through reputation rather than
to the oversight of the shareholders.
litigation.
face, they tend to be
profitability of their firms.
entered into between the
CEO
and
implicit rather than explicit, relying
however,
In either case,
it is
subject
While the shareholders cannot be expected to monitor the
detailed operations of the firm (such as which projects should be implemented and which should
not), they can be expected to monitor the broad structure
that the managers are offered. 10 In our model this
is
is
and
level of the
compensation packages
captured by assuming that when the contract
specified at the beginning of the first period, the shareholders can object
Formally,
than
is
we
shall
assume
if
k
is
that, as profit-maximizers, the shareholders insist that k
set "too high".
is
set
no higher
absolutely necessary in order to elicit effort.
'"Monitoring by outriders, be they shareholden via the Board of Director* or other creditor*
our analysis takes int account some of these imperfections.
11
is
undoubtedly imperfect and
2.
Analysis
The Complete Contracts Case
2.1.
case in which the
The
difficulties
(such as where
cases that follow.
is
a profit-maximizer and faces no contracting or informational
provides a useful benchmark for the more interesting
c is contractible)
In this case the
CEO
would be able to induce the manager to research those
which he wished researched simply by offering the manager a payment of d (the manager's
projects
disutility of effort) to
CEO
The
undertake the task.
would therefore instruct the manager to research certain
implement any project
project
CEO
for
G >
which
He would then
projects.
Therefore, the expected net gain from researching a
0.
is:
G dF{G) -
I
d.
(2)
'o
Note that expression
(2)
implementing projects whose
is
exceeds
G
E(G) — d
who
(1981)
This
is
starting projects which would on average be unprofitable
CEO
What
worthwhile.
if
down
is
continued to the end.
that this option
E(G) — d
and Weitzman
at a later date,
the option of shutting the project
our paper demonstrates
has the option of not
precisely the point of Roberts
note that, in the case of R<kD projects that can be shut
that starting a project gives the
CEO
Therefore, there exist projects in which
exceeds zero.
negative which are worth investigating.
precisely because the
it is
worth
The reason
is
this option
is
down and
not as worthwhile once contracts
is
are incomplete.
With complete contracts any
whenever
if e is
is
its
G
realization of
is
project for which (2)
positive.
\
possibility
including those for which (2)
which projects he
we discussed
will give
is
manager
,.,..,
is
researched and
is
him
earlier
this incentive
whenever
willing to
make
G >
0.
for
implemented
outcome can be implemented even
at the end of the first period (before implementation)
negative. Thus, the
Another among many schemes
manager
G
this
is
is
that the
CEO
tells
the
manager he
Note, however, that this would induce the manager to exert effort in
him E G G.
t
The
positive
As discussed above,
not contractible as long as the value of
contractible.
is
CEO
would also have to
tell
will
pay
all projects,
the manager for
payment.
implementing the complete contract involves paying the
Then the average payment
the requisite effort.
12
to the
manager equals d and the
The Incomplete Contracts Case
2.2.
The
when complete
difficulty that arises
contracts are impossible to enter into can be seen by
contemplating the use of a contract analogous to the second one discussed above. In that scheme
the
manager was
effectively only paid
when
continues to ensure that the manager
not possible to ensure that
all
is
of
G —
1
_ F iQ\
if
the project
is
when the
paid ._-,_,
G >
projects with
At the implementation stage (period
was implemented. Suppose that the contract
the project
implemented.
CEO
the firm to earn no additional profits, but, since the
is
CEO
implements projects only
contracts case, the
projects
their
CEO
G >
if
1
payment
—
of d/(l
F(0))
it
is
effort.
expects
contingent on
Thus a
profit-
_ F Q y Therefore, in contrast to the complete
,
G <
<
does not implement those projects for which
which would be profitable were
CEO
not implemented the
implementation, he also need not compensate the manager for his additional
maximizing
it is
expects the firm to earn additional profits
the project
If
implemented but that
is
are implemented.
the
2),
project
1
_F
i
Some
y
not for the increased compensation to the manager that
implementation would imply, are not implemented.
The
net result
is
that
if
the
manager exerts the
effort
he
is
from exerting
fraction of the time. His expected compensation
paid 1-f
/
\
only a relatively small
effort therefore falls short of
the result that he will choose not to exert the effort, and the project, which on average
will not
is
d with
profitable,
be undertaken.
Of course the optimal contract
contracts
must be incomplete.
We
in the
complete contracts case
therefore
contracts setting and contrast the outcomes
is
not the optimal contract
now examine the optimal
when
there
is
when
contracts in an incomplete
autocratic and
when
there
is
participatory
top management.
2.3.
Autocratic Top
Management
With incomplete contracting the
CEO
which depends on whether the project
is
would choose to implement any project
can only offer a contract which specifies a payment k
which
for
G >
a manager researches will eventually be implemented
manager would be
With such a contract
implemented.
willing to exert effort only
fc[l
-
is
k.
The
in place, the
CEO
probability that a project that
therefore
1
—
F(k).
Knowing
this, the
if
F(k)}
13
>
d,
(3)
i.e., if
his
The
expected increase in
outweighs the cost of
utility
effort.
lowest cost contract which induces the manager to put in the effort
is
therefore that with
the lowest value of k which satisfies Equation (3). Since both the shareholders and the
CEO
to maximize profits in the autocratic case, they are in agreement that the
CEO
payment just
from exerting
large
enough that the manager's increase
exactly equal to his disutility of doing so.
which we denote k a
=
F(d)
0, i.e.,
that case
if
must be
manager
he researches will
effort is
manager
to the
is
paid d
(4)
F(k a )
>
0.
if
the project
is
implemented he
is
is
where
In the special case
profitability of every project exceeds d, then k
be implemented. Hence he
in fact
d.
at least as large as d since
where the increased
the
CEO
should choose a
defined implicitly by
is
a
utility
This payment by the autocratic
k*[l-F(k a )} =
Notice that k
expected
in
want
a
is
equal to
d.
In
certain that every project that
happy to receive a payment of d contingent
on implementation.
If
F(d) >
however, so that there exist some projects which ex post will turn out not to be
0,
have been worth the manager's
effort,
must pay the manager more than
to induce
him
is
k
a
the
paid more
CEO
when he
requires a higher
is
will
exceed
his disutility of effort
be paid some of the time even
will
is
This can lead to a
CEO
a
to research the project in the first place.
realizes that he will only
< G <
then k
That
d.
when
is,
his project
The reason
implemented
is
for this
he puts in the
if
CEO
the profit- maximizing
in
order
that the manager
is
effort.
In particular,
choose not to implement the project. Thus the manager
if
insists that he
paid.
difficulty.
As
payment when the
the project becomes implemented less often, the manager
project
is
implemented. But, this higher payment leads the
to implement the project less often. There might thus exist no
payment
for
which the project
ever implemented, equation (4) might not have a solution.
A
(4).
necessary condition for (4) to have a solution
They do
so only
if
of (4) rises with k only
is
bigger,
is
autocratic.
it is
F
if
is
changes relatively slowly as
the elasticity of
F
that increases in k raise the
G
14
make
its
argument
is
hand
side of
hand
side
smaller than one.
If it
changes. In particular, the
with respect to
impossible to induce the employee to
left
the necessary effort
left
when management
Assuming a
G >
k
a
,
solution to (4) exists, and given that the
the autocratic
CEO's
CEO
implements any project
for
which
firm's expected profits with this optimal contract are given by:
-
(G
/
k
a
dF(G)
)
= f G dF{G) Jk*
k
a
[\
- F(k a
)\
r°°
=
/
GdF{G)-d.
(5)
Jk"
The second term
in (5) reflects the fact that
on average the manager
represents the average profitability of the project and
is
k
implemented ex post,
a
,
i.e.,
the higher
place. This
is
is
k
a
i.e.,
the average value of
A:
tracts case
and
and
The
the average value of
G >
given that
becomes increasingly more
rises it
choose to implement the project, even when
(2)
d.
k
a
.
G
first
term simply
for a project that
This term
is
decreasing in
the lower are the expected profits from undertaking the project in the
because as
Comparing
G
is
paid
is
(5), the
it
turns out that
likely
G
>
expected payment to the manager
this incomplete contracts autocratic
CEO
case.
that the
CEO
first
will ultimately
0.
is
d both
in
the complete con-
However, the increase
in
expected
profits to the firm are lower with incomplete contracts by
G
/
This
is
lost profit opportunities
from exploring the
a
.
(6)
< G <
because the firm loses those profit opportunities where
These
of k
dF[G).
This occurs
project.
The
in particular
can sometimes be
projects are worth doing. However,
[1
it is
—
F(d)\
is
small,
apparent from
be worthwhile to have the manager exert the
a
.
sufficient to eliminate altogether the benefits
solution to (4), assuming
when
k
it
exists, will often involve
i.e., if
a relatively small fraction of the
(5) that if
k
a
gets "too large"
effort in the first place: the firm
exploit its possible profitable opportunities at
all.
a high value
This can occur even
if it
may
it
may
not
not be able to
would be worthwhile
to undertake the project with complete contracts.
2.4. Participatory
Management
In the second period the participatory
implement any project which
is
CEO, who
recommended
to him.
15
cares only about the manager's utility, will
Thus
if
the contingent
payment k
in the
participatory
W
>
management
case
is
f
denoted
the manager will undertake the project provided
,
d.
Since the shareholders will not tolerate a level of compensation for the manager that
excess of
prefer
what
is
required to
an even higher
regardless of
its
elicit effort,
level of
the
CEO
The
compensation!).
merits, and the
manager
is
must
paid
set
P
=
net result
is
that the project
The shareholders
d.
CEO
d (even though the
would
undertaken
is
profits are therefore
E(G)-d-C(0).
Participatory
management has two disadvantages
contracts. First, this regime
projects even
if
project equal
E{G) —
up
less efficient if
is
<
they are not worthwhile (G
his option to shut
d.
C(0) >
As discussed above,
down
Second, the participatory
CEO
implements
is
the value of the project
when the
CEO
gives
unprofitable projects.
Autocracy and Participation Compared
2.5.
Despite the differences in the preferences of the
CEO
in the
two regimes, because of the oversight
imposed by the shareholders, the manager's expected compensation
profits differ however.
is
maximization with complete
Thus, ignoring C(0), the net benefits from the
0).
this
(7)
vis-a-vis profit-
0.
in
is
The
difference
between expected
is
identical.
The
shareholder's
under participation and autocracy
profits
given by:
A=
\G°
-d-C{0)}-{[ G
dF[G) - d - C(0)]
"'
(8)
,*•
=
G dF{G) -
/
C(0).
J -oo
The sign
of
A
is
ambiguous
scales in favor of autocracy.
ambiguous: the sign of the
less efficient at
general.
in
Apart from the
first
term
in (8) is
CEO
inefficiency of participation obviously weighs the
effect of C(0),
intuition for this result
implements
is
however, which regime dominates
is
CEO
is
ambiguous. That
carrying out the operations of the firm, he
than a non-profit-maximizing participatory
The
The
may
is,
even
if
the autocratic
nonetheless produce fewer profits
CEO!
the following.
his project, the participatory
As long
CEO
will
as the
implement
consequences because he values the manager's preferences and not
can easily be induced to undertake his project, and the net result
16
manager stands
is
it,
profit.
to gain
if
the
regardless of the profit
As a
result, the
that every project
is
manager
researched
and implemented. While
that
all
this
means that some unprofitable
projects are implemented,
it
also
means
of the profitable ones are too.
The profit-maximizing autocrat
CEO
understand that as long as the
project, the
CEO
will
unable to achieve this outcome. Both he and the manager
is
required to compensate the
is
manager
have an incentive not to implement some projects.
he implements his
if
In particular, the
CEO will
not implement projects which would be profitable but for the manager's compensation. However,
this
problem then feeds on
implemented and on which he
is
implement the
to
for those
which are
thereby compensated. This in turn reduces the incentive for the
is
must achieve
project, since the expected profit threshold that the project
higher.
The
net result of this
would make higher
is
only be compensated for some fraction of the
will
manager demands a high rate of compensation
projects that he researches, the
CEO
Knowing that he
itself.
is
profits
in the
some
profitable projects are foregone.
Even
if
CEO
the autocratic
he had a participatory style, and therefore be better off himself, there
if
nothing he can do about
and ignore profits
that
it.
While he would
like to
promise to respect only
his
manager's desires
second period, his inability to credibly commit to such a promise renders
the promise ineffectual.
To
see
when the
participatory style dominates
A=
G
/
dF{G)
first
G
+ I
useful to
decompose
A
as follows:
dF{G) - C(0).
(9)
J-oo
JO
The
it is
term demonstrates the advantage of participation:
for projects in the
range
<
< ka
G
participation ensures that profitable projects are implemented whereas they are not implemented
Conversely, the second term illustrates the relative advantage of autocracy:
under autocracy.
unprofitable projects which are adopted under participation are not adopted under autocracy.
The
effect of
the
first
two terms of
the proportion of projects with
in this region that
projects
is felt,
a participatory
G
<
the effect of the
(9) is
is
demonstrated
low, the participatory style
CEO's overindulgence
and where the autocrats intolerance
management
style
is
in Figure
for
1.
is
As that
figure shows,
when
particularly attractive.
It is
of his manager's pursuit of unprofitable
ex post unprofitable projects
is
costly.
Thus
particularly attractive in environments which are relatively
rich in available profitable opportunities.
Autocratic management
is
particularly attractive
17
when d
is
small relative to the possible G's.
From Equation
smaller
Then
k
(4),
a
d the smaller
is
positively related to
is
the region in which the autocratic
is
his operating efficiency
Therefore
effort,
and intolerance
autocracy
is
likely to
is
lies
is
more
dominate the participatory
CEO
Autocracy
will
CEO
style.
is
the entire distribution of
if
in the
in
where there are essentially no worthwhile
and the third term
in (9) will
style.
middle region [0,k a
the region
a
[0,
A:
]
]
will
be more suited to participatory management. That
becomes more
likely
more
is, if
an
becomes correspondingly
and an outcome below
the participatory style becomes more attractive.
less likely,
So
G
researched will be implemented, the more efficient
contrast, any change in the distribution which results in less weight in "the tails" and
outcome
far
our analysis has dealt with the management style that
project.
Firms, on the other hand, have access to
functions
differ.
style of
Thus the
be more profitable.
weigh against the participatory
weight
as well.
foregoes profitable opportunities.
projects. In this case, few projects will be researched in either regime
By
=
then k a
the two regimes are equivalent, except that
1
also attractive in the other extreme
is
=
This has two related implications. First,
efficient.
to the right of d so that every project that
autocratic
d
small compared to the potential gains from his
Notice too that to the right of k a in Figure
autocracy
if
for unprofitable projects are assets to the shareholders.
the manager's disutility for effort
if
In the limit
d.
many
However, we can use the results from
management that
is
is
more
profitable for any one
different projects
this section to
make
whose distribution
inferences about the
suited to particular firms. In particular, firms which face
whose distribution functions have substantial weight
in the
more
projects
middle region where many new ideas are
worthwhile but not revolutionary benefit from participatory management. Insofar this distribution
is
the typical one in areas rich with potentially profitable innovations,
we should
see innovative
firms being participatory.
What
is
more, as Pascale and Athos (1981) report for Matsushita, such firms
will benefit
disproportionately from training their employees. Such training presumably costs resources while
also facilitating the exploration of
the benefits from
new
new
ideas. Insofar the autocratic style
ideas, shareholders
are autocratic. Put differently,
if
does not reap as many of
do not benefit from training the employees whose CEO's
training increases the odds that the employee will be in a position
18
to explore ideas
CEO
is
whose payoff tends to
the region
lie in
k
a
\,
then such training
is
attractive
if
the
participatory and unattractive otherwise.
The Best Manager For the Job
3.
Thus
we have
far
contrasted the autocratic and participatory
discussed the circumstances under which each style
is
[0,
that profit-maximizing shareholders
section
may choose
we go one step further and suppose
is
management
styles
The main
the preferred one.
to hire a non- profit- maximizing
CEO
whose personal
"0"
is
result so far
CEO.
In this
among candidate CEO's
that the shareholders can choose
with different personalities as measured by their concern for their workers. That
that the shareholders can choose a
and have
is,
we suppose
best suited to the environment in
which the firm operates.
In order to
CEO
is
do
this
we examine how shareholder
manager
of type 6 and that the
is
profitability varies
with
offered a contract which pays
0.
Suppose that the
him k e
if
his project
is
implemented.
In that case, in the second period the
has researched
CEO
will
choose to implement a project that the manager
if:
-9){G -
(1
That
is,
k
e
)
+
ek
e
>
G >
if
(
1
Knowing
his
this, the
manager
will
be willing to exert
expected future payments exceed his disutility of
/
i.e.,
if
[1
- F((1
—
effort (set e
effort.
(10)
)ifc'.
—
That
=
1)
during the
him
to work, they require that
e
optima] k e which we denote k '
,
,
is
[1
period
if
is, if:
k"dF(G)
>
d
-)k')k'
>
d.
(11)
o
Since the shareholders insist that the manager be paid no more than
in order to induce
first
is
absolutely essential
Equation (11) be made to hold exactly,
i.e.,
the
that for which
- F((i_i-)fc")]*" =
19
d.
(12)
The
firm's expected profits are then given by:
oo
(G-k
/
which, using (12), can be written
G dF{G)-d-C{9).
(14)
that the autocratic and participatory extremes are indeed special cases of this
first
more general formulation.
—
(13)
GdF{G)-[l-F{k")\k"-C{9),
/
("JZjr)
')dF(G)-C(9),
as:
/
Notice
e
1 in this case).
=
If 9
0, the
autocratic case, then
But then the expression
for
=
it**
a
from equation (12) (since
A:
expected profits
equation (14)
in
identical
is
to that for the autocratic case, in equation (5).
Similarly, the participatory case
—
approached as the limit as $
is
Then, {^fzf) —>
1.
—oo
so
that the expression for expected profits in equation (14) reduces to that for the participatory style
given in equation (7).
the integral
first.
the lower limit
is
The
Two
terms
in
integral reaches a
the lower limit varies with
decreasing in 9 and that
is
there
is
no difference
is
9
=
intuition for this
is
maximized
manager's
utility.
benefit that the
the integral and C(9). Consider
the lower limit of the integral
it is
equal to zero
the lower limit
if
is
zero. If
any higher,
is
the integral varies as 9 varies therefore depends on
straightforward to show that the lower limit
when
9
is
=
how
is strictly
1*
J.
therefore as represented in Figure
2.
C(9) which
also depicted there.
profits are
The
In fact
9.
it is
How
of the integral as a function of 9
increasing in 9
If
maximum when
0,
any lower, negative-profit projects are included;
positive profit projects are excluded.
The value
equation (14) depend on
if
in efficiency across regimes, that
^:
The
"best"
CEO
is
one
who
is
C(9)
his additional
same
for all 9, then
cares equally about profits and his
that at the implementation stage the
manager obtains from
the
is
CEO
cares as
much about
compensation as he cares about the
the
effect of
that compensation on the profitability of the firm. Overall, therefore, he does not care about the
"To
is
see this notice that
positive
when
t'*
lower limit, which
is
<
5,
jj(^rf) =
~j ., <
and negative
thereafter.
the product of
(-y^) and
0,
*'*
so that
(7^)
The term
is
k'"
is
is
a decreasing function of 6
positive,
strictly decreasing in S
20
and from
and
is
(12),
tero
is
when
which
is
equal to
decreasing in 9
S
=
5.
1
when
=
0,
Therefore the
manager's compensation but, instead, worries only about whether
profits of the firm
w>M increase as a
Thus the CEO's ex post
result of
project will only be
implemented
that which would be achieved
than
participatory style
it
turns out to be profitable.
The manager's compensation
in general
2 that
will
overall
outcome
C{6)
if
is
increasing in
6,
though the
identical to
is
the optimal 6 for the firm, 6'
firm should lean in the direction of autocracy (from 6
less efficient in
=
|)
when
,
is
the
conducting the day- to-day operations. The extent to which
It is for
this reason that different firms
have CEO's with different personalities. One interesting implication of our analysis
that, in general, the purely autocratic
This
The
is
the firm were able to write a complete contract with the manager.
should do so depends on the distribution function F.
must
is
is
if
if it
from Figure
Thus the
|.
whether or not the
willing to exert the effort necessary to research the project even
is
strictly less
i.e.,
implements exactly those projects which
incentives are optimal: he
then set so that he
also see
0:
implementing the project.
should be implemented from a profit-maximizing point of view.
One can
G >
be true unless the function
C
and the purely participatory styles are both suboptimal.
rises
very fast with
in
which case
it is
possible for pure
autocracy to be optimal.
The management
style,
and hence the
that the firm should seek to explore. In other words
is
positive.
The investment
of complete contracts
choose obviously affects the range of projects
9 that firms
affects that range of projects for
which (14)
and Weitzman (1981) apply only
in the case
it
rules derived by Roberts
and that they have to be suitably modified depending on the management
style of the firm.
4.
Conclusions
We
have presented a model where shareholders select the firm's leadership style to maximize ex
ante profits. This leadership style affects the corporate culture of the organization in that employee's
beliefs
about how they
will
be treated
in
various circumstances
depend on
this leadership style. In
the model, maximization of ex ante profits sometimes requires that the firm not be too keen on
maximizing ex post
In our setup,
Leadership style matters because
profits.
we have
it
can achieve this aim.
followed Fiedler (1965) and Graves (1986) in
depend on the personality of the chief executive. This
we could have imagined that
is
making leadership
style
not an essential assumption. In particular,
firms develop reputations for having certain styles as in Kreps (1984).
21
Thus managers
of certain firms
would
foster a participatory style simply because
style (by
making a decision that the managers
be more
in line
dislike)
would cause a
abandoning that
loss of reputation. This
would
with Perrow (1970)'s view that corporate culture depends mostly on interaction
between people and
is
relatively unrelated to their psychological characteristics. Since even Kreps
(1984)' construct relies on small probabilities of having an "irrational" personality,
straightforward to give personality a
more
central role as
we (and
Shleifer
it
seems more
and Summers (1987))
do.
The
principal open question left by this research
is its
empirical relevance. To what extent does
the distinction between participatory and autocratic styles help us understand the effectiveness of
research inside of firms?
To what extent are these
of executives to their environments
differences in leadership style the clever responses
and to what extent do they hinge on the personality of the
CEO?
Fiedler (1965) shows that the extent to which the leader gives a favorable description of
co-worker
his least preferred
orientation of the leader.
to be
more successful
These
task.
positively correlated with the permissiveness
is
He
also
in decision
than the groups
in
shows that leaders who give such favorable descriptions tend
and policy making teams and
seem to involve more research
activities certainly
which the more autocratic leaders performed
open by Fiedler's research
is
whether the regard one has
a feature of one's personality or whether
Miller, DeVries
extent to which
and structure
personality traits.
what happens
to
groups that have a creative
well.
These
we have considered
latter groups include
combat crews. One question that
for one's least favored co-worker
is
molded by the work environment.
and Toulouse (1982) and Miller and Toulouse (1986) study more
CEO
(i.e.,
it is
in
of the type that
basketball and surveying teams, open hearth shops and military
is left
and human-relations
personality affects both strategy
(i.e.,
directly the
whether the firms are innovative)
whether the firms are autocratic). Miller and Toulouse (1986) consider three
The
them
first is
is
locus of control. Individuals with internal locus of control
the result of their
own
actions while those with
more external
control tend to view their environment as having a larger role in shaping their
life.
feel
that
locus of
Miller and
Toulouse report that firms whose executives have an internal locus of control tend to innovate
more and
also tend to delegate
statistically very significant
more. The relationship between locus of control and innovation
while that between locus of control and delegation
22
is
is
significant only
at the
10%
level.
Another personality attribute they consider
ous and adapt
who
easily, those
whose personality
is
more
the latter relationship
is
is flexibility.
more
are not tend to be
flexible
Those who are
rigid.
flexible are adventur-
According to their study, CEO's
tend to lead firms that innovate and delegate more though only
The
statistically significant.
finding that there exist personality traits
which leads to both more innovation and more delegation seems broadly consistent with our
ory
if
one views most innovations as being the result of research whose payoff tends to
"middle" region [0,*
Finally, Miller
].
and Toulouse (1986) consider need
nAch
for
achievement (nAch) of various executives.
set relatively difficult goals for
themselves and try to achieve them with
outside help. Miller and Toulouse show that executives with a high need for achievement tend
to lead innovative firms that delegate
This seems inconsistent with our story that innovative
little.
firms delegate.
However, closer inspection of their results show that this correlation
for small firms.
Thus they seem
for
the
lie in
a
Individuals with high
little
the-
achievement
is
to be picking
true only
up the existence of individual innovators whose need
high and, in part as a result, succeed in creating viable companies. This
inconsistent with our theory
if
these innovations are
that delegation helps subordinates (not the
One
is
CEO)
made by
the
CEO
himself.
Our theory
is
not
implies
to be innovative.
of the reasons the results of Miller, DeVries and Toulouse (1982) and Miller and Toulouse
(1986) are only partial
is
that they focus on different psychological traits than those that emerge
naturally from our theory.
In our theory,
for the welfare of his employees.
what
is
important
is
the extent to which a
CEO
cares
This might well be measurable by some index of empathy
like
the one proposed by Mehrabian and Epstein (1972). Mehrabian and Epstein (1972) report that
subjects whose index of
suggests that
employees
it is
well.
empathy was high were
quite possible that
Thus one implication
sectors ought to have
CEOs
also willing to spent
measuring high on
of our theory
CEO's with a high index
is
more time helping
this index
others. This
might want to treat
that firms that do relatively well in innovative
of empathy, holding everything else constant.
23
their
5.
References
Badawy, M.K.: "Industrial
and Engineers: Motivational Style
Scientists
Management Review,
Differences, " C&liforma.
Fall 1971, 11-16.
Buss, Arnold H. and Stephen E. Finn: "Classification of Personality Traits," Journal of Personality and Social Psychology,S2, 1987, 432-44.
Coase, Ronald: "The nature of The Firm,"Economica, November 1937, pp. 386-405.
Fiedler, Fred E.: "Engineer the
Oct. 1965, 115-22.
Job to Fit the Manager," Harvard Business Review, 43, Sept.-
Graves, Desmond: Corporate Culture
-
Diagnosis and Change, St Martin's Press, 1986.
Holmstrom, Bengt: "Moral Hazard and Observability," BellJournal of Economics, Spring 1979,
74-91.
and Jean Tirole:"The Theory of the Firm" in Richard Schmalensee and Robert Willig
Handbook of Industrial Organization, North Holland, 1989.
Kreps, David: "Corporate Culture and Economic Theory," Working Paper,
May
1984.
Lawrence, Paul R. and Jay W. Lorsch Organization and Environment Harvard Business School
Press, 1967.
Likert, Rensis:
Human
Organization, McGraw-Hill, 1967.
Mehrabian, Albert and Norman Epstein: "A Measure of Emotional Empathy," Journai of Personality, 40, 1972, 525-43.
Miller,
Danny, Manfred F.R. Kets DeVries and Jean-Marie Toulouse: "Top Executive Locus of
its Relationship to Strategy Making, Structure, and Environment", Academy of
Control and
Management Journal,
1982, vol. 25, pp. 237-253.
Danny and Jean-Marie Toulouse: "Chief Executive Personality and Corporate Strategy and
Structure in Small Firms", Management Science, vol. 32, Nov. 1986, pp. 1389- 1409.
Miller,
24
2
U b
Pascale, Richard T.
and Anthony G. Athos The Art of Japanese Management, Warner Books,
1981.
Perrow, Charles: Organizationa/ Analysis:
A
Sociological View,
Wadsworth
publishing, 1970.
Roberts, Kevin and Martin L. Weitzman: "Funding Criteria for Research, Development and
Exploration Projects," Econometrica, 49, September 1981, 1261-88.
Ritti,
Richard: "Work Goals of Scientists and Engineers," Industrial Relations, Feb 1968, 118-31.
Shleifer,
Andrei and Lawrence H. Summers: "Breach of Trust in Corporate Takeovers",
Tannenbaum, Robert and Warren H. Schmidt "How
Business Review 96, March-April 1958
,
25
to
1987.
Choose a Leadership Pattern," Harvard
Autocratic Style
is
Better
Autocratic and
Participatory
Style
Participatory
is
Better
Styles
are
Equivalent
Figure
1
:
Comparison
for the
of Autocratic
and Participatory Styles
Case Where Qd)
26
is
Zero
f
Figure
2:
The Optimal Value
27
of 6
GdF(G)
Date Due
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