HD28
.M414
DEWEY
1^3
ALFRED
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
P.
Power
in Profit
Maximizing
Organizations
Julio
J.
Rotemberg,
MIT
School of Management
June, 1993
Working Paper No. 3582-93
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
Power
in Profit
Maximizing
Organizations
Julio J.
Rotemberg,
MIT
School of Management
June, 1993
Working Paper No. 3582-93
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
NOV
1 4 2000
LIBRARIES
Power
in Profit
Maximizing Organizations
Julio J.
Rotemberg
Current version: June
*
15,
1993
Abstract
This paper considers the question of how profit maximizing firms make decisions.
recognizes that
members
It
of these organizations tend to have incompatible preferences
over decisions but that willingness to pay for decisions plays a very limited role in actual
decision making.
Instead, a sizable empirical literature
"important" to their organization,
i.e.
who
documents that people who are
provide critical services, are hard to replace,
or deal effectively with the shocks that affect the organization, are powerful in that they
have disproportionate influence over decisions. This paper shows that
power over decisions to those who are
The
recison
is
willing to
pay the most, can be
that the right to shape the firm through
attractive as an employer. Thus, decision
this,
its
decisions
and not giving
profit
maximizing.
makes the firm more
making power should be given
to those employees
that the firm wishes to retain for a long period of time.
*Sloan School of Management, M.I.T. I wish
Management Workshop for valuable comments.
to
thank
Tom Kochan and
the participants at Stanford's
Human
Resource
Power
in Profit
Maximizing Organizations
Rotemberg
Julio J.
Organizations provide their members with a great variety of non-pecuniary sources of
makes a superhuman
The problem
is
differ across
members. So, decisions that give a great deal of
that, unless the organization
less utility to others.
install
While
all
members might agree
that
it
carpets, preferences over the details differ. Even
new
effort at
utility to
homogeneity, preferences
some members
would be nice
when
it
utility.
comes
to
often give
expand a building or
to decisions that affect
the long term success of the organizations, such as personnel decisions, people differ in the kind of
person they would
like to
be surrounded with.
Employees are thus willing
profit
to pay to affect the firm's decisions.
maximizing firms take decisions they should take into account the reductions
compensation that are possible as a result of these decisions.
of
This implies that, when
two decisions which produce the same revenues, a
decision which allows
it
to reduces employee
profit
In particular, confronted
in
employee
with a choice
maximizing firm ought to choose that
compensation the most. These considerations suggest
that firms would benefit from schemes that ask employees for contributions and which pick that
decision for which employees are willing to contribute the most.
In practice, decisions inside firms are very
decision
making
rights or on the basis of
any other mechanism that
are three possible explanations for this absence.
that the firms are not profit maximizing at
The second
sometimes
is
find
seldom made on the basis of either auctions
The
first,
which
is
elicits contributions.
embraced by March (1962)
that auctions present special problems inside firms. Finally, the third
it
There
and that the process of decision making proves
all
for
is
is
it.
that firms
advantageous to make decisions which do not correspond to those for which their
employees are willing to pay the most.
I
explore this third possibility here.
employees by taking decisions that they
In particular,
like is
I
construct a model where compensating
not a perfect substitute for raising their current
wages.
The
result
that the firm will find
is
it
advantageous to compensate certain types of
indi-
viduals with high wages while others are compensated disproportionately with decisions that are
taken according to their wishes. Wages differ from influence in one crucial respect. The employee
does not have to remain with the firm at
t
+
to enjoy
1
contrast, the utility from having an influence at time
gives
may
give one pleasure
that makes
utility
some
t+
more
it
from the
from
attractive.
all
the benefits from his time
(
wage. By
t
is
less portable.
feeling in charge but
it
also changes the organization in a
The problem from an employee's point
fact that the organization
of the utility from the decision at
is
t is
more
attractive
collected only
if
when he
Influencing decisions at
of view
is
t
way
that he only gets
actually works there. Thus,
the individual remains an employee at
1.
This has two implications. First, individuals
are, all else equal, willing to
pay more
who expect
for the right to
to stay at
t+
1
have decisions made according to their wishes.
the firm were just trying to mimic the outcome that would prevail with an auction
Thus, even
if
they would
let
these individuals have a large say. Second, and
more importantly
the firm will benefit by implementing the wishes of those employees that
high probability, even
The reason
is
if
these are not necessarily the employees
who
it
what amounts
to a
my
purposes,
wants to retain with
are willing to pay the most.
form of deferred compensation. The motivation
giving influence to this subset of employees would vanish
that specify future wage compensation in
to specify future
wages
wants to keep, even
if
all
if
may
benefit
cis it is
not possible
from giving influence to employees
it
others are willing to pay more.
becomes which types of employment relations do firms want
prolong by these means. By knowing the answer to this question, one knows
who
firms in the sense that they have a disproportionate say in firm decisions.^ This
question in part because there
who have
for
the firm could write complete contracts
states of the world. But, as long
in this fashion, the firm
this point, the question
employees
for
that, by following these individuals' wishes, the firm raises the probability that they
will stay in order to collect
At
with higher probability
is
to
has power inside
is
an important
a substantial empirical literature documenting the features of the
power.
'This is essentially the definition of power proposed by Dahl (1957). He says A has power over C if he is likely to affect
C'a behavior. Moreover, A is regarded as having more power than B if y4 is more likely to affect C'a behavior than is B This
corresponds in my setting to the idea that A has more power if he is more likely to succeed in having the firm adopt his favorite
course of action.
In particular, influence
First, as suggested
role.
seems to be associated with two characteristics of a group or employee's
by the "resource dependence" theory of power (Emerson 1962) those who
control important resources tend to have power. Second, as implied by the "strategic contingency"
theory of Hickson et
large
and
arise
(1971), those
ai.
randomly tend
who can
help their organization cope with problems that are
to have power.
Evidence for the importance of control over resources
(1978)
large
who show
amounts
provided by
Pfeff"er
and Salancik
that those academic departments within universities that either bring in the
of grant
monies or that teach a great many students have power. Further evidence
provided by several papers which build on
who occupy
is
Tushman and Romanelli
(1983) and
is
show that individuals
central positions in the communications networks of organizations have large influence.
Evidence for the view that power flows to those that can cope with uncertainty can be found
in Crozier's
(1964) observations of maintenance workers in French tobacco plants. These were able
to cope with
machine breakdowns and, as predicted, had a great deal of power.
evidence for the strategic contingency theory
I
will
is
More systematic
presented in Minings et al (1974).
argue that the findings of this empirical literature are consistent with
other words,
I
will suggest that
my
model.
In
groups and individuals that either have control over important
resources or help the firm cope with uncertainty are likely to be ones whose presence the firm
What
wants to prolong.
more, a closer reading of this empirical literature gives further credence
is
to the notion that firms give
power to those
it is
keen to keep on the payroll.
This paper thus takes issue with March (1962) and Pfeffer (1981).
the evidence on decision
(1962) views
firnris
making
inside firms
is
instead as political coalitions.
inconsistent with profit maximization.^
In this
of owners are not
^This study
all
as well as
of the coalition" (p.
that important in decision making.
many
In other words, people are
members
March
view "the focus of attention shifts from
the owners to the actual, operating organizers of the coalition...
loose constraints on the active
Both authors argue that
My
(Stockholders')
demands form
112). In other words, the objectives
aim
is
to
show that
this
de-emphasis
others including Perrow (1970), Minings et aJ.(1974) measures influence by reputational variables.
to have power if others believe that they do. See Pfeffer (1981) for evidence that people who
deemed
power tend to have a lot of power in practice.
power extended well beyond pure maintenance issues. Croiier reports "Finally, any change in the organisation
of production itself, any move by the assistant director in his own domain, will be subject - because of the position of the
maintenance workers as natural leaders in the shop - to the interference of the maintenance department and its all-powerful
chief." (p. 126) This shows that, unlike what happens in the theory of Jensen and Meckling (1992), power does not necessarily
flow to those who have the best information about what decision is best. Pfeffer (1981) contains several other examples where
power goes to people other than the "experts".
*They actually take issue with the broader idea that Arms pursue any superordinate goals.
are viewed as having
''Their
of owners
not warranted by
is
much
of the existing evidence.
Similarly, Pfeffer (1981) dismisses the idea that decision
he means "goal consistency and congruity"
ular goal
making
and he views
(p. 20)
is
profit
assumed by economists. He contrasts these perspectives by saying "The rational model
that parochial interests and preferences control choice" (p. 22).
model implies that "choice should be
groups"
He thus regards
.
in predicting
who
it
relatively
He goes on
to say that the ratio-
uncorrected with the preferences of the same
as invalidated because, aa
we saw, group
as follows.
In Section 1,
I
characteristics are very helpful
present the basic structure of the model: two
employees have divergent preferences over some decision.
the profit maximizing solution
make
model presumes
political
has power.
The paper proceeds
to
rationality,
maximization as the partic-
presumes that information and value-maximization dictate choice; the
nal
By
"rational".
is
to let the
the decision. In section 2,
I
set
employee who
I
is
show
that, without other distortions,
willing to
pay the most have the right
up a model that has a distortion which can be ameliorated
by the selective granting of power. In particular, employees have outside
periods that they work for the firm.
The
a high compensation in the future.
The reason
result
employee both today (because he knows that he
is
is
off"ers in
each of the two
that the firm would like to be able to promise
that this disposes of the danger of losing the
will receive a high level of
income
in the future)
as well as in the future period.
But,
it
seems plausible to assume that firms are not able to commit to the future compensation
of the employee.
The most important reason
for this is that there are
good reasons to
terminate the employment relations for exogenous reeisons (such as changes
needs).
Moreover, the constellation of reasons for termination
cannot plausibly be written into a contract. Rather,
whenever
future
I
it
wage
show
it
sufficiently
makes sense to
let
employment
complex that they
the firm
fire
the employee
wishes. But, in the presence of this freedom, any contract that specifies the employees
will be renegotiated.
in
Section 3 that this absence of
commitment
power to the more valuable employee even though he
as other employees. But,
will
is
in their
let firms
if
the firm
is
free to fire the
is
implies that the firm might wish to give
not willing to pay
eis
much
for this
power
employee then any promise of a future wage
be renegotiated. Section 4 focuses on groups rather than on individuals.
What makes
groups
from individuals
different
what payment they
will receive in the future)
sometimes
equilibria
that groups tend to consist of both young employees (who are unsure
is
exist that provide
and old employees. The result
some wage
security to employees.
I
is
that reputational
show
that, nonetheless,
power might be given to the more valuable group.
Section 5 returns to issues of individual power.
employees
will
shows that the desire to keep valuable
It
sometimes lead the firm to distribute power very unequally.
It
will
do
this
even
certain cases where the employee benefits from this concentrated power are smaller than the
of benefits employees would obtain
if
in
sum
power were distributed more evenly. Section 6 departs from
the earlier sections by treating the case where individuals use their power only to increase their
income
(as
opposed to using
income
raise one's
will
it
to obtain non-pecuniary benefits).
tend to flow to individuals
who
show that even
I
are valuable in the
here,
power to
Section 7
first place.
concludes.
A
1.
static setting
In this section
affects its
I
with divergent preferences
consider a one period model where the firm has to
employees' welfare. The purpose of this section
is
to
make one
demonstrate that,
distortions, employees' willingness to pay plays a key role in optimal decision
for
is
what
and
is
follows,
I
then turn to a discussion of the ways
in
decision which
in
the absence of
making. As a prelude
which the empirical literature on power
not consistent with this model.
Consider an owner entrepreneur whose firm has two risk neutral employees
two jobs a and
6 respectively.
Both employees work
for
it
makes sense to imagine that
that this preference arises only because
A
prefers
a.
gives
and
B
that
fulfill
one period and, before the beginning of
period, the entrepreneur has to choose between two decisions which
notation,
A
a whereas
A more
B
I
will label
prefers
a and
/?.
Given
In this section
fi.
I
this
this
assume
non-pecuniary benefits, and similarly for
B.
Moreover,
I
assume that
issues considered in Jensen
decision
making
decisions.
The
rights
idea
is
by more. The reason
if
this decision has
no other
effect
on
I
thus abstract from the
and Meckling (1992). They emphasize that employees
will
be given
they are particularly well informed about the consequences of various
that better informed employees are able to
I
profits.
ignore these considerations
5
is
make
decisions that raise profits
that observers of power and decision making
inside organizations such as Crozier (1964)
to the best informed.^
That
and
Pfeffer (1981) stress that
power
is
often not allocated
not to suggest that expertise plays no role in decision making.
is
It is
rather that the benefits from giving power to experts will have to be traded off against the benefits
from allocating power
I
a
suppose that,
if
in the
a
is
way that
B
units of compensation while
much
as
A
chosen,
is
suggested by the models
knows a and
^.
will consider.
gets non-pecuniary benefits that are worth as
gets no non-pecuniary benefits. Similarly,
units of compensation and has no
/S
I
He should then choose
eff"ect
/?
on A's
utility.
Suppose
and lower B's salary by
to
him
as
raises B's utility as
that the entrepreneur
first
exceeds
if ^^
^^
/?
much
a and should
choose a and lower A's salary by a otherwise. This strategy for the entrepreneur leads him to gain
either
a
or ^, whichever
is
larger,
In practice, the entrepreneur
and has no
is
effect
unlikely to
on the employees'
know
the values of
the decision, the entrepreneur could auction the right to
English open outcry auction (in which the decision
pay the most
make the
in the sense that the other
decision himself)
otherwise.
The
exceeds a,
B
would
let
employee
B make
difference with the case
who
decision-making.
number
if
is
the decision to the two employees.
made by
the employee
who
is
willing to
not willing to pay more to get the right to
if /?
exceeds
a and would
this right
/? is
let
that,
A make
it
assuming ^
and would thus personally gain
/3
—
a.^
value the non-pecuniary consequences of decisions more should
The question
is
whether this simple model of
deci-
certain individuals and groups have a disproportionate influence on
In the one-period
of decisions
so that the employees
where the entrepreneur knows a and
be given the right to make these decisions.
making can explain why
is
make
the decision
would only have to pay a to get
In conclusion, individuals
sion
a and ^
Supposing that each employee knows only their own private value of
will gain informational rents.
An
utilities.
model considered so
far,
individuals
the value they assign to the non-pecuniary benefits
possible origins for such a high value.
The
first is
make disproportionate
is
high.
that these individuals get
There are two
more
utility
from
getting their way. This seems like a rather tenuous basis on which to explain the empirical distri-
bution of power.
The reason
is
that power appears to be systematically related to variables such
as the degree to which the individual
and groups's action are important
in buffering the firm
from
An example from Croiier (1964) is discussed in footnote 3.
*This solution works so well because the value of the decision is purely private to the individual Matters would be more
complex if the utility of several employees were affected by each of the choices available. Nonetheless, mechanisms with
characteristics similar to an auction which do achieve efficient outcomes exist in this case as well (see Groves and Ledyard
(1977).
external shocks and the degree to which substitution of these particular employees by outsiders
difficult (see
Minings
et a/. (1974)).
It is
is
hard to see why these factors would be associated with a
large utility for particular decisions.
The second reason an
fits
stemming from many decisions
in their
the
make
be
is
that they cissign a relatively low value to marginal increments
money
income. They are then willing to give up more
Such a low marginal
their well-being.
in
individual or group could assign a high value to the non-pecuniary bene-
first
utility of
income
is
to obtain decisions
income
likely to arise if one's
The theory would then imply that a disproportionate number
made by high-income employees. This can
potentially explain
have power. After
all, it
are critical
(Emerson (1962)), or cope
with the firm's uncertainties (Hickson et ai.(1971)) and are hard to replace (Minings
tion.^
large
of decisions would
why employees which
to the firm in the sense that they either control important resources
The
is
Thus, people with higher income should be willing to pay more for the right to
place.
decisions.
which increase
et aJ.(1974)
seems plausible to suppose that such valuable employees get high incomes.
distribution of power can thus be derived from the distribution of income in an organiza-
Mowever, this analysis
fails to
account
for
two
sets of facts. First,
it
does not rationalize the
absence of explicit side payments in the process of making decisions.
Second,
workers,
it
cannot explain the existence of employees, such as Crozier's (1964) maintenance
who have
Nor does
relatively less
it
a great deal of power and relatively limited income.^
account for cases where highly paid professionals
power than
outcomes such as these,
I
line
employees whose income
is
fulfilling staff
lower (Dalton (1959)).
construct a model where equilibrium wage income
^This analysis assumed implicitly that the firm was already
important caveat because some of the empirical studies of power
harder to be certain that the wages paid by these institutions are
summarized in Pfeffer (1981), Pfeffer and Salancik analyzed the
is
functions have
To
not set so as to
paying individuals the profit maximizing wage.
distribution involve
optimal
in
the
first
deal with
This
government-owned institutions and
is
it
an
is
place. For instance, in a series of studies
power of various academic departments within the confines
and the University of California systems. They showed that departments which brought in grants
were powerful in that they tended to be represented on important committees and that the promotions of their faculty were
more rapid. If one imagines that these universities were unable to pay these valuable faculties more because of bureaucratic
rules then it would make sense to give them non-pecuniary favors instead. Thus power in these institutions can be a substitute
rather than a complement for income.
'At this point it might be argued that, in spite of the absence of auctions or other market mechanisms inside firms, the
political process produces the same outcome as "as if" the decisions were made through a market mechanism. But, particularly
with the collapse of communist regimes, we generally regard explicit market mechanisms as superior to central planning even
though, to some extent, central planners do in fact emulate markets.
* Crozier reports that management "would like [the maintenance workers) to apply for supervisors' jobs, but they consistently
refuse what they consider an unattractive offer." (p. 105). This suggests both the supervisors are paid more [since otherwise
management's offer would not make sense) and that the amenities (including power) of the supervisors are smaller Thus power
and income are not in direct proportion.
of the University of Illinois
.
The
ensure a fully optimal employment relationship.
certain employees to
remedy
important
2.
A
I
in the
then that power will be allocated to
is
this equilibrium deficiency in wages. In the next section
equilibrium wages in such a model when there
then demonstrate
result
no opportunity
is
for giving
power
I
derive the
to employees.
I
subsequent section that giving power to valuable employees can play an
role in this context.
model -where wages tend to be
now suppose
in later periods
that the firm operates for two periods rather than one.
employee to have outside opportunities both
The reason
is
and
in the current
that the firm would benefit from promising
the future.
low
inefficiently
that such promises,
credible,
if
do
this to allow the
in the future period.
employees that they
its
I
will receive large
result
payment
is
in
would reduce the employees' temptation
Before dealing with outside opportunities,
to leave today at a relatively low cost.
The
I
specify the
other determinant of the employees' wages, namely their value to the firm.
I
assume that employees
more valuable
job.^°
A
and
B
have some firm-specific
human
capital and, as a result, are
same
to the firm than potential outside employees that can in principle carry out the
The revenue produced by
their outside replacements
these employees in period
can produce only
R*^
R\ and
R'g respectively while
and wl respectively. As a
w'^
A and B
vf^Rf-R^ + w^
equals
and Rl respectively. The outside employees,
were to be hired, would require wage payments
firm would be willing to pay employees
t
in period
=
vf
i2f
-
t
i?*
result, the
bent employees. Without loss of generality,
I
It is
will
they
most the
equals
+
u;*
.
=
1,2
(1)
These are the differences between the value produced by the incumbent employees and the
the firm can extreict from their replacements.
if
profits
the value contributed to the firm by the incum-
A
assume that employee
produces more value so
that vf exceeds vf
I
It is
will
show
in the
next section that individuals with high
thus worth discussing the sources of such high
v's.
v's.
The
will obtain disproportionate power.
In particular,
characteristics of employees that have been associated with
be thought of as raising employee's
t;
power
I
want
to
show that those
in the empirical literature
root cause of the difference in v's
is
'"This lack of ready replaceability has been shown to be an important determinant of power by Hickson
Hinings et ai.(1974). It plays a crucial role in my analysis as well.
8
human
can
capital
et ai.(1971)
and by
i.e.,
the acquired or innate characteristics that
make
superiority can be the due to intrinsic abilities, but
positions where the employee
is
the employee superior to
it is
new employees. This
often the result of being placed in a specific
able to acquire information
whose possession
valuable to the
is
firm.
It
seem plausible that control over important resources allows employees to
mation. Employees
who
collect such infor-
control resources presumable can prevent others from learning
how
them. Thus, Crozier's (1964) maintenance workers prevented others from knowing how to
to use
fix
the
machines by making manuals disappear. '^ This ensured that they alone had the requisite knowledge, and
power
in
made them
valuable to the firm.
explain Pfeffer's (1981) evidence concerning
academic departments within universities along similar
which bring
in large quantities of
of value in the
employees
is
likely to
Iccist
many
be much more costly
groups and individuals
in
(in the sense that
departments that teach few students and bring
who can cope with
new employees
income or student happiness
et ay.(1971)
uncertainty have high
to perform as well as old employees
and Hinings
The reason
v's.
if
in little
is
difficulties in the past are
more valuable than new
the degree to which a subunit copes with uncertainty.
which the subunit
is
They do
money.
et ai.(1974)
that
it is
If,
who have coped
Hinings et a/.(1974) measure
this
by combining the extent to
is
in fact uncertain. ^^
Scoring highly on
measure of coping would seem to require a great deal of specialized knowledge which,
implies a high
much
involved in activities that deal with unforecastable events^'^ and information
on whether the environment facing the particular subunit
this
ones.
will fall)
they face a routinized task.
instead, the task involves coping with a great deal of variability, then employees
with such
students tend to
some incumbent employees provide a great deal
seems plausible that, as suggested by Hickson
easier to train
He shows that departments
form of money and happy students. Replacing these proven incumbents with new
than replacing incumbents
also
lines.
grant monies and departments that teach
have power. These are departments where at
It
One can
in turn,
v.
Finally, there
is
a large literature originating with
Tushman and Romanelli
(1983) which shows
that the extent to which one communicates with others in the organization affects one's power. In
"See
Croiier (1964)
p.
153.
'^They measure whether the group tries to prevent unforecastable events from happening, whether the group tries to anticipate
these events and whether the group tries to "absorb" them so that they have a minimal effect on the firm
''Depending on the unit the relevant uncertainty involves unforecastable movements in the level of sales, its composition,
the quality or quantity of
its
inputs or the credit-worthiness of the customers.
particular, being central to this "interaction network" raises one's power.
The reason could
that being central involves an extensive knowledge of the organization which raises one's
who know
focusing on networks inside firms, Krackhart (1990) shows that those
communications better,
its
i.e.
well be
Also
v.
the network of
those whose personal depiction of the network parallels more closely
actual links, have power. Knowledge of one's organization
is
both something that takes a long
time to acquire (so that new recruits would lack such knowledge) and
done. Thus, such knowledge too would give a high v to
In addition to the employee's internal value, there
its
is
is
crucial for getting things
possessor.
a second determinant of his wage. This
The key assumption
my
is
the employee's opportunity set in the outside labor market.
is
that individuals have access to outside offers both in the current and the future period. These
outside offers do not present difficulties
would then separate
trast, the firm
to
do
so.
But,
if
more
outside options. This
in his
relies critically
(and thereby keep the employee) when
it is
very hard to
component
know the value
is
con-
efficient
of compensation
is
some-
the employee assigns to the
on the lack of observability of the
first
period offer
non-pecuniary benefits from
is
better informed about
first
offer the
employee receives
observable or not does not
decisions.^'' Therefore,
model by assuming that the employer knows the characteristics of the
that assuming the employer
it is
By
offer.
second period of employment. Whether the
affect the analysis in the case of
firm and the employee
individual's value to the firm.
true not only because the monetary
is
non-pecuniary benefits of the outside
argument
offer
more than the
The
analysis
assume that the firm does not know the value of individual's
realistic to
times unverifiable but also because
My
the firm knows their value.
the outside offer pays
would match the outside
it is
if
for
period offers
first
period
is realistic.
I
simplify the
ofTer. It
may
In particular,
be
it
seems reasonable to suppose that young people are treated more symmetrically by the job market
(so that their outside offers are relatively similar).
Moreover,
it
that young people in general are more adaptable so that they are
to
move.
By
suggest that there
show
seems plausible to suppose
more equal
in their willingness
contrast, only a subset of older employees have attractive outside options and, in
addition, only a subset of
'*I
also
in Section
is less
them
is
ready to change their
lives
midstream. Both these arguments
information about the outside options of older employees. In any event.
6 that, in the case of pecuniary benefits, the lack of observability of
10
first
period offers plays a role as well.
the
main reason
for
assuming that the
first
period offer
common knowledge
is
that
is
it
simplifies
the analysis.
To
are
A
further simplify the analysis,
drawn from the same
and
B
have available
two periods.
If
A
I
distributions.
I
I
assume that both employees have access to
offers that
thus assume that the outside options that employees
period pay them a present discounted value of z over the
in the first
remains at the firm
variable with distribution function F.
same
also
in
period one, his second period outside offer
B's second period offer
is
a
random
drawn independently from
is
this
distribution.
eissume that the firm cannot precommit
at the beginning of the current period.
j a wage equal to
W^
After this wage
.
I
start with the second period.
it
sets the employees' current
At the beginning of period
is
the firm offers
t,
its
announced, each employee receives an outside
W^
in
exchange
Employee
A
leaves
decides whether to stay and collect the wage
wages,
wages so that
its
his
employee
offer
and
work. To study equilibrium
for his
when
wages
wage
W^
is
smaller than his
outside opportunity and similarly for B. Thus, the firm sets wages to maximize
Assuming there
a positive probability that outside offers are below than
is
vi^,
optimal wages
satisfy
f{wi){vi
- Wi] - F{WI) =0
j
= A,B
(2)
This implies that the wage of employee j must be smaller than v^ so that employees sometimes leave
to take jobs where their productivity
Hall and Lazear (1984).
between the weige and
The
its
is
lower. This inefficiency arises here for the
firm benefits in spite of the inefficiency because
reservation value in
all
it
same reason
as in
gains the difference
the states of nature where the employee remains
with the firm.
Another implication of
(2),
and one that
will play a
key role below,
for a given distribution function of offers, raises the probability
can see this from the fact that the derivative of
(2)
Wj
W^
is
is
One
positive while the second
negative.
so that the probability that employee j stays rises as well.
11
that an increase in v
that the employee stays.
with respect to Vj
order conditions require that the derivative with respect to
raises
F
is
Thus an
increase in V2
This suggests that employees
who have
a lot of specific
human
capital (so that their v
is
high while their outside offers tend to be low) have a high probability of remaining with the firm.
human
Consider by contrast the case of employees whose general
high but the probability that they will get outside offers below v
that the probability that these employees will remain
In period
1,
capital
is
leave.
high so that their v
Equation
low.
(2)
is
then implies
low.
is
the employees do not stay unless they can expect the
whether they stay or
is
Thus period one wages must be
Wi = z-pl F{W^)Wi + y""
same present value
of
income
at least equal to
xdF{x)
(3)
J
The
resulting profits of the firm are
'^"'=
I
it
\v{-z + p\F{Wi)vi+
assume that both the term pertaining
were negative
first
E
for either
A
to
r
xdF{x)]\
(4)
and that pertaining to
in (4)
B
are positive.
employee, the firm would be better off letting that employee leave
in the
period.
It is
worth contrasting the outcome
A
to pay prespecified future wages.
(4) itself.
The
first
with what would occur
in (4)
firm with the ability to
if
the firm could
precommit would
set
W2
commit
to
itself
maximize
order conditions for this problem are
f{wi){vi-Wi)^0
This implies that the second period wage
that period. This
in
period
offset
by
2.
may seem
The reason
its ability
Because
is
the firm does this
to pay a lower
(2) implies that the
wage
is
wages themselves
fall
(5)
set equal to i^ so that the
surprising since the firm
is
effectively giving
up
its
is
efficient in
monopsony
position
is
in period one.
second period wage
is
like to
over time. Indeed, as long as u^
set
below
commit
is
Vj,
we can conclude that second
itself to.
This does not mean that
sufficiently larger
consistent with rises over time in each employee's wages even without any
rise or not, the firm
outcome
that the resulting increase in second period wages
period wages are lower than what the firm would
they
If
would prefer to commit
itself to
12
than
v[, the
model
is
commitment. Whether
pay the same present discounted value
in
the form of a compensation profile that rises even
more
shall see that letting individuals
make
benefits similar to those of such
wage commitments.
The
3.
I
power
role of
in the basic
now introduce power
The
the relevant decision.
issue
decision in question
a discrete decision as
I
is
An
K
is
taken before the beginning of the
in Section
firm.
them power, achieves
made
decisions are
according
making
as officially in charge of
A
or B.
period. Rather than assuming
first
assume that the owner must choose a parameter
I
1,
by his own income minus with
works at the
if
then whether the firm acquiesces to
is
assumed
giving
i.e.,
owner of the firm
A's utility
/c/3.
The
that the non-pecuniary benefits and costs that
as he or she
period
individual has power
treat the
I
K which can be either positive or negative.
utility is given
first
we
model
into the model.
To keep matters simple,
to his wishes.
The
decisions in the
steeply over time. In the next section,
it
This seems natural
is
given by his income plus /ca while B's
crucial
confers
if
assumption concerning the choice of
must
affect
each employee for as long
one thinks of the decision as involving the
purchase of a long lived asset or the hiring of a co-worker. Insofar these make the employee better
off,
they do so for whatever period the employee actually works with the capital or the co-worker.
It is
commit
worth noting
itself to
at this point that decisions will be
make
employees.
a exceeds
the decision that maximizes the
while increasing B's.
it
the firm should set k to
/3
If it
knows the preferences
would do best by setting
keeping the difference.
I
will
Section
2,
particular,
now show
/c
1,
its
will
To make
of
all
utility as V2.
1
if
the firm can
There
is
then no
the non-pecuniary benefits of
largest possible value
and reduce A's wage
employees and the largest value of k
reducing A's wage by
a
in
all
each period, raising B's by
is
one,
/9
and
^^
when
that,
the owner cannot pre-set future compensation in the model of
demonstrate that the owner
higher) even in cases where
his way.
=
of
sum
its
willingness to pay will sometimes play a
I
just as in Section
paying a second period wage that gives the same
reason not to
If
made
this point,
B
I
other employee incurs no losses,
it
will
make
assume from now on that
of
its
all
exceeds a.
is
I
A
willing to pay
will
show
(whose v
more
In
is
to get
that, nonetheless
can once again conduct an auction for the right to make the
win the auction but, if the firm wants to make sure that the
the resulting wage savings to the other employee.
employees,
it
for the decision will
have to give
/3
role in the decision.
the decision favored by
has a larger stake in the decision and
'*When it does not know the preferences
The employee with the most value
decision.
will
much more muted
13
make k
the owner will choose to
Given a particular choice of
=
n,
Assuming
{vt
when va
positive
/c,
wages
as before that the solution
is
sufficiently high.
second period are chosen to maximize
in the
- W^)FiW,'' +
is
Ka)
+
(vf
- W,^)F{W,^ -
k^)
(6)
interior, the first order conditions for this
maximization
are:
f{W^ +
^&)[v^
- W^] - F{W^ +
The second order
/ca)
=
/{Pyf
maximum
conditions for a
is
K.
To
see this,
I
One
issue that arises at this point
is
(8),
equation
(9) implies that
larger than /) or that
in spite of
it
The
that
result
— ^2
/(v2
I
is
-
f'[v^
W^ +
na
how
A
stays
higher
is
would exceed the cost
F
and obtain
- W^]
^
This means that increases
To understand
W^ +
employee who
is
is
willing to
that the firm chooses
maximization
/c
to
A likes
not, by itself a sufficient
pay more. To see
K&)[v^
rises
wage
so
slightly
this,
suppose that we ignore period one and assume
profits in (6).
- W^] - pf[wf 14
more valuable
for not allocating the decision to the
The
first
is:
+
na
constant as well.
raises the probability that the
argument
maximize the second period
a/(Vy/
— W^^]
in koc raise the
this result note that lowering the
F
'
of doing so.
have shown that making the decision that
this
when k
the probabilities of departure depend
would be that, since the wage would be lower, the benefit from raising the wage
)
(7)
(8)
kept constant would keep the probability of staying
is
=
A's wage either rises with k (in the case where /'[v^
the subsequent adjustment of the wage.
employee stays. But
this
2/
k^)
= A,B
declines by less than the increeise in /ca. In either case,
probability that the employee will stay.
much
j
diiTerentiate the first equation in (7)
dKa
Given
- W^] - F(Pyf -
larger, equation (7) implies that the probability that
is
set equal to zero.
on
K0)[v^
then requires that
/'K'-O-2/<0
Because va
+
/c^)[vf
- W^\ =
order condition for
which, using (7) becomes
aF[W^ +
Ko)
- 0F{Wf +
This means that a should be positive (so that
probability that
for
an increment
A
stays exceeds
k
in
is
equal to
A
a times
small amount ensures that the winner
which
in
is
k,
=
should make the decision) when a times the
B
times the probability that
13
stays. But, A's willingness to
pay
the probability that he stays and analogously for B. This
means that an auction between the two employees
model
K^)
is
for the right to increase (or decrease)
the person that ought to
make
by a
/c
the decision.
Thus, the
why
willingness
chosen only with second period profits in mind does not explain
to pay plays such a small role in firm decision making.
my
therefore turn
I
attention to the
first
period.
As
in
my
analysis of the second period,
start
I
by treating k as known and derive the equilibrium wages. These are particularly straightforward
because
if
I
assumed that the outside
offers of the
them a wage
is
employee assures himself a present value of
z.
the firm wants to keep the employees,
indifferent
By
W^ +
than
two employees where known
it
must
offer
Thus,
in this period.
them
at least sufficient to keep
between staying and leaving.
leaving, an
Kct in the first period.
this. If
In the second period, he gets
the second period's outside offer
the wage that keeps
him
is
W^ +
higher, he leaves
By
/cq
staying, employee
if
his outside offer
and gets the outside
A
gets
is
lower
offer.
Thus
indifferent satisfies.
roo
W^ = z and similarly
for
Ka - pF{W^ + Ka){W^ +
Ka]
xdF{x)
(10)
B.
By paying these wages, the present discounted value
TTp
-
= vf +vf -2z +
/c(a
-
of the profits from
A
and
B
^)
roo
roo
+
p\
F{W^ + Ka)[W^ +
+ [4 - Wt)P[W^ +
Using Leibnitz's
K
becomes
/ca]
K~0)
+
+
/
(vf
xdF{x)
+ F{wf - k0){W^ -
- W^)F{wf -
rule, the derivative of this present
/c/3)}
k0\
+
xdF{x)
(11)
discounted value of profits with respect to
IS
{a[l+pF(Py2'' + «a)l-^ll+pF(tvf-/c^)]}+p[a(v2^-PV2'')/(<+«")--^(^f-^^2^)/(^^2^-'^^).
(12)
15
to pay for an increment in k
Employee A's willingness
Thus
for B.
and only
A
is
for
B
an increment than
is
+ pF{W.^ +
pay
willing to
and similarly
/ca)]
decrement
for a
if
if
+ pF{W^ +
a[l
is
more
willing to pay
d(l
is
positive. This expression
is
Ka)]
-
^{l
term
identical to the
that the term in square brackets of (12) which
is
+ pF{W^ -
in curly
k^)]
(13)
brackets of (12). Equation (7) implies
the difference between the expression in (12) and
the expression in (13) equals
p[aF{W^ +
- PF{W^ -
/ca)
k^)]
(14)
Therefore, as long as A's probability of remaining in the second period exceeds B's, (12) can
be positive even when (13)
probability of remaining
t;
higher
is
when k
We
for a negative k.
is
The economic
must pay
in
A
A
wage
will
is
B
effects is equal to the difference
But, there
in k.
remain at the firm
The main motivation
the
same
human
offers
is
in
an additional
as B's.
capital his v
high probability.
^
where
B
in his
expected
k,
specific
A
The
instead of a.
less
it
t;"^
raises the
difference between
between the two employee's willingness to pay
effect of raising
/c.
Doing so
is
that his v
human
capital.
is
pay
A
is
for
for
raises the probability
more valuable,
changes
this effect
in k.
large while his distribution of offers
If,
instead,
A
would be higher but he would also tend to get higher
result
willing to
lowers the wage that the firm
disutility.
in the willingness to
power to
Thus A has more
The
is
then the higher value of
/3,
period 2 (and lowers B's). Because
for giving
were very unlikely to pay
choose
a =
if
the following. Raising
by the increase
can be sufficient to overcome any difference
is
this larger value of
period one by the expected benefits that thereby accrue to A. Similarly,
a small change
that
Thus,
gets his way.
rationale for this result
wages that must be paid to
these two
larger.
that A's
thus have the possibility that willingness to pay will be overridden
by the desire to keep the more valuable employee. Indeed,
immediately implies that
is
to a positive value even in cases
/c
Remember
willing to pay more).
zero because his v
is
can be sufficient to induce the firm to set
pay more
B
negative (so that
is
had only more general
offers.
than v^, the firm would set a wage so that
A
If
these outside
would leave with
would be that expression (14) would be negative and the firm would
Thus power comes from
specific rather
16
than general
human
capital.
This
implication
is
supported to some extent by the findings of Fombrun (1983) and Ibarra (1993). They
show that tenure on the
human
capital,
is
which
job,
likely to
is itself
be positively associated with having specific
positively correlated with influence over decisions. ^^
They
also
very highly correlated with centrality in the interaction network which, as
is
has been shown to be correlated with power
The previous
Given (12) and (13)
earlier,
papers.
as
It is
A
k raises the probability that
in
will stay
and reduces
both A's willingness to pay for an increment to k and
this raises further
the firm's benefit from doing so.
to an employee.
many
mentioned
analysis shows conditions under which the firm prefers a slightly positive value of
K to setting k equal zero. But, any increase
5's.
a great
in
I
show that tenure
there were economies of scale from conferring power
if
Doing what an employee wishes
raises his probability of
remaining with the firm
thereby raising the desirability of giving him what he desires. This means that the approach taken
in this section,
where the derivative of
B
are given power,
In
subsequent sections
is
profits
with respect to k
appropriate only when k
I
constrained to
is
is
used to determine whether
lie in
A
or
a small interval around zero.
thus return to the approach of section one where the firm must choose
between two discrete decisions.
The
setting
is
result in this section
can be given yet another interpretation. The firm's problem
that high wages are a very costly
are costly because the employee
shift
is
power benefit him
What makes
it
it
The
first
period.
for a long time.
retains the employee in the second period. Giving
This sets
it
advantage of giving an individual power
in clubs, the
makes with
Power thus leads to deferred (non-pecuniary) compensation.
a particularly good form of deferred compensation
the deferred compensation.
They
firm would prefer to
helpful in this regard because the decisions that the employee
makes the employee happy has been made
memberships
of retaining the employee in the
leave in the second period anyway.
compensation towards the future so that
an employee power
his
may
way
in this
is
in the past,
it is
is
that, since the decision that
impossible for the firm to renege on
apart from renegotiable offers of future wages.
Another
that, unlike other contractual obligations such as lifetime
employee only gets to receive the compensation
if
he remains with the
firm.i^
'*
Unfortunzitely these studies, like
many
other empirical studies of power, do not analyze wages Thus one could interpret
it does in much of the labor economics literature) and that
these regressions as showing that tenure raises wages (which
employees whose wages are high "spend" some of these wages on influence.
'^Lifetime membership in a club would have this property if and only if
potential employers were located in its vicinity.
17
it
were not transferable and there were no other
An
4.
Overlapping Generations Model with Reputations
In the previous section,
1
because doing so makes him
literature
on power
showed that a valuable individual employee might be given power
in organizations,
this
is
consistent with the empirical
important to realize that much of power
is
it
While
to depart.
less likely
really
is
group
power rather than individual power.
Thus, designing engineers have a
firms where the product that
changed often. Similarly, Crozier reports that maintenance
workers as a group had power
and
is
sold
is
in the factory
distinction between individuals
and groups
some sense the
B
as constituted of groups of people with similar tastes. This
members
not.
The
they
all
result
remain
of one group acquire a lot of specific
would then be that designers,
in the
company. The only
have both old and young workers
in
many
power
in certain
he studied.
In
v's if
lot of
human
is
One can
immaterial.
group of people can
capital while
members
think of
A
differ in their
in the
other do
example, are given a great deal of leeway so that
for
difficulty
with this interpretation
of their groups.
As
is
that firms tend to
Kreps (1990), the existence of such
in
overlapping generations would, under certain conditions, allow the firm to establish a reputation
for
paying high wages to old workers
who belong
to valuable groups.
This would then avoid the
need to give power to these groups.
In this section
I
consider an overlapping generations model with reputations that
Klein and Leffier's (1981) model of product markets.
to receive high
power)
wages (or power)
in the past.
in the future if
In other words, the
In this
past.
still
I
show
if
payment of high wages
that, in the context of this model, giving
it is
is
(or the granting of
power) builds
destroyed so that employees expect
power to groups whose members are valuable
profits.
essence of the argument
group power than
model members of a group expect
the firm has stopped paying high wages (or taken power away) in the
has the potential to raise
The
is
that
it is
easier to maintain a reputation for giving the valuable
to maintain a reputation for giving
them high wages.
In other words, the
incentives to deviate are smaller in the case of a reputational equilibrium with power.
is
I
that deviations in which the firm cuts wages raise the current profits of the firm.
will
based on
they have always received such high wages (or
a reputation for doing so in the future. But, this reputation
low wages (or no power)
is
show that deviations where power
is
taken away from the valuable employees
18
The reason
By
contrast,
may
actually
lowers current profits.
The
section
divided in two subsections.
is
The
first
deals with reputational wages in the
absence of power considerations while the second incorporates power explicitly.
Wages
4.1.
an Overlapping Generations Model
in
consider a setting where employees in two groups
I
employee
in
group j provides a value
A
employment each employee has an outside option which
z^.
is
With probability
(1
two periods.
young)
is
In the first period of his
old).
is
Each
worth z to him
in present value. In the
a probability / that the employee receives an outside offer whose value
—
is
him only m.
/) the employee's outside opportunity pays
v\
>
and
Z2
+
vl
pv^
so that the firm would keep both types of employees in
22 in
On
—
the second period and z
the other hand,
(1
The
for
assume that
I
them
is
work
employment (when he
v\ in the first period of his
while he provides a value Vj in the second period (when he
second period, there
B
and
-
I
assume
f)i^2
pz2 in the
^
j
^^
all
periods
=
B
^,
if it
(15)
could commit
itself to
first.
also that
-m)>
v^-
or
Z2
/v^ < Z2
-
{1
- f)m
(16)
inequality in (16) implies that, ex post the firm prefers to pay the employee the lower
rather than
22-
This
is
profitable even though setting the
stays only with probability (1
in this discrete
—
paying
wage equal
to
wage
m
m implies that the employee
/) rather than with probability one. Condition (16)
is
necessary
model to ensure that second period wages without commitment or reputation are
inefficiently low.
A
reputational equilibrium
employees of type
wages.
_;
in the
its
firm pays a high wage,
W2
to
stay in spite of the low wages because they believe that they too will
wages when they are
high wages to
The
the following structure.
second period and thereby convinces young employees to accept low
The young employees
receive high
heis
old employees,
old.
it
On
the other hand,
loses its reputation
if
the firm ever deviates from paying
and the young employees come to believe
that they will receive low wages in the second period.
The
firm hcis nothing to gain from paying wages between
equilibria with
wages higher than
22 are
m
and
22 in the
second period and
even harder to sustain than equilibria with second period
19
wages of
pays
22.
thus investigate only whether there
I
employees
22 to its
—
accept a wage of 2
in the
pz^.
If
a reputational equilibrium such that the firm
is
By doing
second period.
so,
it
convinces
such an equilibrium exists, and there
is
its
young employees
to
number
of
no growth
in the
employees, the firm's expected present discounted value of profits starting at an arbitrary date
^ VJ+VJ- Z-[l-
^r
P)Z2
l-p
were to deviate, the firm would pay
If it
expect to be paid
m in the second
its
^
old employees
period so they would
demand
m}^ Young
'
employees would then
a salary of (2
— p(l — f)m — pf zi).
subsequent periods, young employees would demand the same wage so that there would be no
In
reason to pay the old employees any wage other than m.
deviation
is
The deviating
reputation
its
d
=
vf
-
When
22.
^
+
-
(1
/)(v^2
-
sis
(19)
f and
p,
is
m
(18)
<
Z2
—-{I
+
satisfied, the firm profits
is
22.
-
p){z2
There then do not
Whether
is
in the
now assume
'*
how
even though V2 exceeds
satisfied
p,
exist equilibria of this sort
f and
unclear.
m
and equilibrium wages
are sufficiently low in practice to rule out
What
is
required
is
that there be a long period
offers are relatively unlikely.
Overlapping Generations Model
that a discrete decision must be
firm must choose in each period between
gain a.
is
(19)
by deviating from any reputational equilibrium whose
where employees can be exploited because good outside
I
by maintaining
- m)
are sufficiently small this condition
second period equal m.
Power
p/22
if
reputational equilibria in the real world
4.2.
- P)m) +
(1
profits in (18) exceed the profits in (17) that the firm receives
second period wage
in the
of profits starting at a
^—^
vi
As long
The present value
therefore
.
A
is
In addition, all the
a and
employees in
/?.
A who
made each
If
period.
the firm chooses
work there
As
a
in the first section, the
all
current employees in
in the next period gain
a
as well.
Following Klein and Leffler (1981), I assume that young employees react in the same manner to any deviation no matter
small. Given this reaction, deviating by paying
is more profitable than deviating and paying a second period salary
m
m
reason is that the higher wage has no effect on the probability of retaining the employee. Because v'^
which would induce
exceeds 22 which exceeds m, paying
is also more profitable than paying a second period salary below
all old employees to leave.
between
and
22- '^he
m
m
20
Thus, choosing a generates non-pecuniary benefits
A
that future young employees in
Employees
in
B
utility of
employees
an employee
in
B
gain
lose
^ when
any
utility
when a
the firm chooses 0.
Z2
—
between
is
2a.
The
m
— 2a and
— 2d
z^
this
is
22
-
I
/? is
on the
in
stays with probability (1
if
his
— 25
wage
is
—
both the
/)
if
his
equal to or greater than
if
(20)
consistent with (16), the condition under which the firm prefers to pay
Thus, as
in Section 2,
m
making the choice
prefers raises the probability that he stays at the firm.
will
suppose that (20) holds and that the same
is
true of the analogous condition for
B when
chosen
/vf >
My
final
assumption
fv^ <
is
22
much more
22
-
(1
equilibria, the firm prefers that
These equilibria
outcome
I
same group
firm always lets the
- f)m - 2f0
(1
- /)m - fa
it
of people
22
-
(1
(or 2/9)
- f)m -
is
replaced by
d
//3
(or
/9)
(22)
worthwhile to pay the second period employees so
when they have been
now show
will
(21)
when 2a
fvf <
that they stay with probability one
only one of the two periods.
his favorite
-
that neither (20) nor (21) hold
In other words, the firm does not find
in
eff"ect
- /)m - 2fa
(1
rather than 22 in the absence of power considerations.
A
A
while he stays for sure
fv^ >
that
Instead, current and next
This latter choice has no
in
firm will choose to set the wage equal to Z2
Note that
is
A. These effects on utility change the wage that the firm must pay to retain
current and the previous period. Then, an old employee
wage
chosen.
is
second period. In particular, suppose that the firm has chosen a
in the
different
is
gain as well.^^
do not gain or
period's employees in
two periods, as before. What
for
given their favorite outcome
that there exist reputational equilibria where the
make
the decision.
I
will also
show
that,
among
these
which gives power to A.
exist as long as
young employees
believe that whatever group has been given
be given their favorite outcome in the subsequent
in the current period will also
"The model can easily be generalized so that value of past a'a is different from that of current one's One can even distinguish
between the value to an old employee and that to a young employee form having had a chosen in the previous period What
matters for the analysis is that there be some advantage to future A employees of choosing a in the current period.
On the other hand, I also assume that exceed d
^"The condition may appear more stringent because v^
u^ is lower than v^
Wj
and that helps to ensure that (21) holds
.
21
period.
I
chosen
start
by computing the
chosen today, and
in the past, is
when
the analogous profits
profits that the firm
chosen
/? is
would earn
at such an equilibrium
expected to be chosen
is
(22)
is
wage
satisfied, the
Expecting to receive
this
wage was bigger than
the previous period and chooses
in
for the old
wage
Current period profits
in the next period,
-
in
2(1
A
+
While current period
tt"
If,
=
vf
and
-
p)q
p{z2
-
2a)
=
-
p)22
-
z
+ v^ -
2
-
(1
vi^
B
would remain
vf -
+
(1
-
(1
Comparison of
A would
in
Because
22
is
"
2a.
stay as long as their
- la
pz2
(23)
z
-
/)(vf
-
(1
- p)m) +
+
(1
-
(24)
pjZ2
(25)
(25), total profits are
+ v^ + vf +
+
in this period.
+ 4d
-
(1
/)vf
+ 4a -
\lz
i)v^
/?
\2z
+
(1
-
(26) with (27) reveals that the firm
always choosing a even when
^
/?
in the future, the expression
+ vf + vf + 4^ -
exceeds
a
as long as
v^
+
p{\
instead of always choosing a, the firm has chosen
=
grants power.
that maximizes current profits
young employees
profits in
therefore expected to choose
;r^
A
a again
it
I
would then be
vf
(24)
in
compute
I
or equal to
z
Adding
employees
a was
After computing these steady state profits,
in perpetuity.
consider deviations in which the firm changes the identity of the group to which
Suppose the firm chose a
Then
in the future.
if
p{\
j))zi
+
(1
in the past,
-
p)(l
chooses
analogous to (26)
+
/))22
+
(1
- /)m]
-
^ today and
sufficiently higher
is
is
p){\
- /)m]
would gain higher steady state
is
(26)
than Uj
.
(27)
profits
Once
by
again,
the firm can gain by giving power to the more valuable employee.
For there to exist an equilibrium where
deviate at the point at which
assuming the firm
heis
it
makes
A
(or
its decision.
been choosing a and
is
B) always gets power the firm must not want
To analyze the
incentives to deviate,
expected to continue doing
22
so.
I
I
to
start by
then compute the
current profits from deviating by choosing 0.
young employees
22
—
2/3 in
in
B
I
suppose that, as a result of this deviation, the
will
expect the firm to choose
again in the next period. Expecting to be paid
/?
the next period, they are willing to work for
z- PZ2in the current period.
in
B
only worth
m
will stay as long as their
still
-
vf
{z2
—
d).
B
wage
this,
A
whose outside
With
/9).
+
Z
+
pz2
+ il-
m
expect to be paid
between staying and leaving
z
The
resulting current profits in
vf
Adding
n-^
=
vt
The
(29)
and
-
2
+d+
wage
their
if
(29)
is
in the following period
between (m
(m —
is
and
—
d). Similarly,
so, conditional
a-
A
-
pfz2
- f)m
p{l
on
To be
workers must thus receive
in the current period, these
-
d) and
(30)
are
pfzi
+
p{l
- f)m +
(1
-
f){v\
-m + a)
(31)
(31), total profits in the period of the deviation are then
+ vf+{l-
f){vt
+ vf +
)
(2
difference between these profits
^2
Assuming that
these
-m + ^)
f){vf
staying in the current period, they expect to leave with probability / in the next period.
indifferent
the
equal
equation (22) implies that the profit maximizing wage
currently young employees in
(m —
inside the firm equals
employees would leave with probability /
Given
^ because
to
leave with probability / because of (22). However, those
wages, current profits in activity
In A, old
a were equal
if
of utility on the job (as opposed to 2d).
Old employees
is
(28)
This expression would be larger than (23)
young employees receive only
offer
^
is
-
(1
-
/)(d
and w^
+
^)
-
[2z
-
p{l
(2
-
/)(d
+
+
(2
-
p)(l
-
f)m] (32)
is
- f)m - fv^ -
2//3
+
no smaller than d, (21) implies that (33)
profits in the period of the deviation are smaller
f)z2
is
negative.
than steady state profits when
period after the deviation, profits are given by n^.
23
(33)
/3)
This means that
is
chosen. In the
p
It
thus follows that,
this deviation
is
if
the gap between v^ and vf
The reason deviations
that power only works in retaining employees
when
are so unattractive in this setting
is
who have been
powerful in the past and
not sufficient to retain those that used to be powerless.
Now
consider the reputational equilibrium where
show that the
profits in the period in
possible that even in this case this deviation
than
TT^
Thus,
for sufficiently
right
left
hand
hand
side of this expression
is
not profitable. The reason
+ -^n'^ <
1-
is
I
may
find
Nonetheless,
.
that n°'^
is
lower
(34)
the present value of profits after the deviation while the
0. If (34) holds, there
is
an equilibrium
This
is
particularly
firm might have traditionally given power to one group of employees
When
because they were the most valuable.
valuable, the firm
x^
-
This suggests that firms can be stuck giving power to the "wrong" people.
A
as well. This
even though profits are higher when the firm always chooses a.
where the firm always chooses
change.
is
n'^'^
-^
from remaining with
side represents the profits
likely if conditions
straightforward to
low p
n^^
The
It is
sufficiently high, exceeds
if u'^ is
its is
.
always chosen.
is
which the firm deviates by choosing a equal
deviation leads future profits to equal n" which,
it
more
conditions change so that another group becomes more
profitable to continue to give
power to the traditional group
even though giving power to the other group yields higher steady state
5.
is
applied twice. Deviations that change the
it is
balance of power for one period lead to defections by those
is
sufficiently large that n°' exceeds tt",
is
not profitable. Profits in the period of the deviation are lower than n^ which
lower than steady state profits.
itself
p
profits.
Concentrated versus Diffuse PoAver
In the next
two sections
arise in the case of
I
return to issues surrounding individual power. While similar issues
group power,
it is
analytically
more convenient
the overlapping generations aspect of group power.
existed a single decision that
appear more equitable
is
to
instead of choosing either
which
offers
some
is
taken following either
compromise and
a which
give each
favors only A, or
Up
A
to this point,
or B's wishes.
employee a
/?,
I
An
little bit
have assumed that there
alternative,
of
what he
which might
desires.
Thus,
the firm might prefer a third alternative 7
benefits for both employees. In particular,
24
to deal with these by ignoring
I
suppose that this alternative leads
B
to get utility equivalent to
7^
A
units of cash while
gets the equivalent of 7^*.
In addition,
I
assume that
7'^
+ 7^ > max(Qj)
so that, in addition to being equitable, alternative
7
(35)
efficient;
is
it
many
provides at least as
non-pecuniary benefits as the other alternatives.
One
To make
interpretation of this third alternative
suppose that employees
this concrete
though they have sometimes
is
A
and
A what
B
By
7^ + 7^
is
common
In
a
with Section
or
2,
in separate physical locations
Alternative 7 then lets each employee
o;
.
can be thought of as
But, because getting what one desires
/3.
I
assume that the firm operates just
for
two periods.
section 3, however, in assuming that the employees outside offer in period one
second period
is
worth either
m
or
salaries in the first period
it
would choose
7.
It
offer in the
Z2
— y^
while B's equals 22
and similarly
for
—
sometimes affected
is
than getting one's wishes at one's main location,
visits rarely is less valuable
larger than either
work
a exceeds 7^ because A
he desires in both locations. Thus
one
as involving "local" decision making.
contreist, alternative
by B's typical environment. Similarly, ^ would exceed 7
at the location
it
typically
each other's locations.
visit
determine some local characteristics of the job.
giving
to think of
7^. A's
22-
If
is
the firm can precommit
would then
let
its
z while the
second period
A's second period payment equal
period payment would then equal 2
first
worth
follow
I
—
pz2
—
(1
+
p)t^
B. The resulting profits would equal
E E
p^'-%i +
in-2z
(36)
t=l,2j=A,B
which, given (35) exceeds the profits the firm can obtain under precommitment with either a or
Given the
is
earlier
development,
profitable for the firm
The
period.
firm finds
it
should be clear that the question of whether the 7 alternative
depends on whether
it
profitable to keep
fvt >
which
is
analogous to (20). Because 7^
equivalent condition for
B
is
/?.
it
A
induces the firm to keep the employees in the second
with probability one by paying him
Z2-{1- f)m is
22
~
";
2/7^
smaller than a,
it
is
if
(37)
possible that (37) as
weU
as the
violated even though
fv^> Z2-{l-f)m-2fa
25
(38)
and the equivalent condition
for
B
are satisfied.
will
I
assume
what
this in
follows. It implies that
the choice of 7 induces each employee to leave with probability / in the second period whereas the
choice of
a
or
^ would keep one employee with
The choice
m—
7^.
This
wage
of 7 then leads to a
in
of
m
probability one.
—
turn means that the required
-y'^
A
for
A
period wage for
first
replaced by y^ while B's wage can be computed analogously.
is
the second period while B's equals
in
The
a
given by (30) with
is
resulting present value of profits
then
E
=
'r-r
+
('^i
f
)
+
/>(!
-
+
f){^2
1')
-
2{z
-
pfz,)
(39)
i=A,B
It is
(38)
is
straightforward to establish using similar reasoning that profits from choosing a
satisfied equal
vf + vf
These
differ
from (39)
and a
gain of pfv2
consistent with (1
loss of
+ p)a
+a+
in that
Note that
profits
is
(1
v^
- /)vf ) -
(1
+ /?(! —
is
(2^
-
pfz^)
when a
(40)
chosen.
is
larger than the latter,
+7
/))(7
), it is
The
result
and because
is
(35)
a
is
possible for the expression
in (39).
from choosing
sufficiently high value of
+Q+
stays with probability one
being larger than
by (40) as long as one switches the
a
A
p{v^
pf Z2. Because the former
exceed the expression
in (40) to
if
when
A
fi
when
and
relative to
B
the condition analogous to (38)
superscripts and replaces
a by
vf implies that giving power to
A
is
satisfied are given
0. Thus, once again a
is
more
attractive even
smaller than $.
This section has demonstrated that
A even
the power in
interprets
7 as giving
local decision
making power.
thought of as the only available option
Employees
If
7
is
interpreted in this way,
it
all
efficiency
better to implement 7. This can be viewed as a benefit of organizational size
it is
h.
possible for the firm to be better off concentrating
though from an equity viewpoint as well as from a complete-contracts
viewpoint
or activity
it is
if
one
should be
for single activity firms that specialize in either activity o
in these single activity firms still
have to interact with people carrying
out the other activity. But, in the case of independent firms, the identity of the firm with which a
particular employee interacts
together.
It
out activity
then makes
6 in
little
is
likely to
change over time since nothing binds two particular firms
sense to give
A control over
a particular firm.
26
the environment of the employee carrying
The
the
choice of
same firm
a
thus an attractive option only
is
is
the two activities are carried out within
or between firms subject to a long term contract.
a {A) be confident of the
where a
if
more
environment with which he
6
profitable than 7,
we expect
Only then can the employee doing
will interact in the future.
So, in the case
same
firms to either carry out activity 6 within the
firm or at least to have a long term contract with a firm that does
A
that one can thereby extend the environments over which
The
benefit of doing so
is
has power and thereby retain him
in
b.
the firm.
My
demonstration that a can be more attractive than 7 even when 7 would be chosen with
complete contracts does not mean that the incompleteness of contracts specifying future compensation creates a bias towards the concentration of power. Suppose in particular that (37) and the
analogous condition for
B
are satisfied so that both employees stay with probability one
7
is
from giving power to those whose departure
is
if
chosen. Then, profits from 7 equal
j=A,B
which exceeds (39) and (40) as long as (35)
As
is
satisfied.
in the earlier sections, the firm benefits
thereby averted. The choice of the equitable alternative 7
to retain employees than a choice that concentrates
7 become more attractive
6.
Power
The
with the
to raise one's
if
more employees are
is
thus
less attractive if it is less likely
power more. By the same token, the choice of
likely to stay
cis
a result.
income
decisions considered so far gave individuals non-pecuniary benefits. In this section
Ccise
enacted, put
of pecuniary benefits.
them
in
The
idea
is
I
deal
that individuals prefer decisions which, once
a position to ensure that their salary
is
high.
A
rather obvious example
is
the
case where individuals seek promotion for themselves. Almost equally obvious are the cases where
individuals seek to have the firm
embark on an investment project that makes particular use
their expertise. Quite generally, decisions
different individuals are in the future.
seniority,
I
will
assume
made by
the firm affect
how
critical to the firm's success
Thus, instead of assuming that the
in this section that
of
v's
depend only on
they depend also on the decision taken at the beginning
of the first period.
27
The
to
individual employee gains from having the firm increase his v because that leads the firm
pay him more. The firm reacts
employee as he becomes more
way because
in this
becomes more concerned about
it
Thus, the firm's choice of project involves
critical.
the probability that one employee stays.
I
show that the employee whose
internal value
In this section,
I
a
B
to the firm stays equal to Vj
implies that, in the second period, the value of
On
.
second period to vf while that of
A
A
this
stays equal to v^.
commit
period while the second implies that they would receive
The outcome with commitment
It
should thus choose
and should choose
or
probability one.
^3
a
(15)
Z2 to
in the
raises the value of
B
in the
and (16) both hold. The
both employees
in the
second
absence of power considerations.
straightforward. Since both employees stay with probability
if
otherwise.
Without commitment,
The
it
is
once again
firm will indeed choose to keep the employee
fx/s
If
m
/?
critical
whether choosing
leads the firm to pay an employee Z2 in the second period and thereby keep
/3
which
assume that the choice
any event, the firm should choose the project which increases the value of an employee by
in
more.
is
assume
I
paying
itself to
I
to the firm rises to v^ while the value of
the other hand, the choice of
implies that the firm would like to
first
first
demonstrate
high will get the firm to raise his value
is
modify the model of the previous section as follows.
of
a
I
further so as to raise his wage.^^
still
one
part raising
Since the firm extracts more surplus from A, the firm
thus tends to prefer the project which raises A's internal value. In this section
formally.
in
losing the
I
will
the
>
Z2
-
(1
-
f)m,
j
whose value increases
him with
if
= A,B
(42)
assume from now on.
first
period
off'er is
known
to equal 2,
eis
I
have
I
assumed
until
now, the firm
sets a
period wage that ensures that both employees stay with probability one in this period. This
'^'Another reason the firm will tend to raise the employee's wage is that the choice of project conveys information to the labor
market. Choosing the project which uses intensely the skills of A suggests that A is particularly adept (see Waldman (1984). I
ignore this in what follows.
^^ In a model with more stages, this increase in value also leads directly to increases in power. This suggests that a multiperiod
version of this model would show entrenchment in the sense that individuals with large power (due to high initial v's) would
gain further power (because the firm would make their v's grow. For evidence of entrenchment, see Morck, Shieifer and Vishny
(1989).
28
implies different wages depending on whether the firm chooses
A
implies that
expects his wage
period wage equals {z
first
—
the second period to equal
in
pz^)-
he must be paid a wage equal to
By
—
[z
B
contrast,
—
pfz2
a
or
/3.
He
Z2-
will
m
can only expect
the firm chooses a, (42)
If
thus stay as long as his
second period so that
in the
p{l
—
f)rn] in the first period.
p {v^
+
(1
The
resulting profits
are
vf + vf
An
-2z +
Thus a
is
more
profitable
in curly brackets
higher.
Once
as well.
the edge
more
fz2
}
fz2
}
if
- 4) is
the
i^l
same
choosing a in the case of commitment.
values increase by the
+
+ vf -2z + p[v^ + {l- f)4 +
{{^S
The term
/)vf
from choosing ^ equal
identical derivation implies that the profits
v^
-
- ^2)} +
-
f[^2
t^f
)
>
(43)
as the expression in (41) which equals the net gain from
Thus
(43) says that, in the case
same amount, the firm should choose a
is
where both employees'
A's second period value
again, the firm favors the employee with higher internal value.
Even though the decisions
when A
is
raise the value of
more valuable because
is
initiaOy
similar
both individuals by the same amount, a has
raises the probability that
it
The reason
is
A
stays and
A
produces
value.
Note also that willingness to pay plays no
role in this decision.
Because having the firm make
the choice that favors a particular employee raises that employee's future wages to z^, employees
are willing to give
willing to give
One
slight
up some of
their first period
drawback of the model considered so
maximum
is
—
is
that the employee
surplus from the decisions that favors them. This
benefit for the employee
far
exchange.
in
up the same amount, namely p[\ — f){z2
each employee's wage by the
whose main
wage
is
m).
that, in equilibrium, the firm does reduce
is
particularly implausible in the case of decisions
that they raise his wage.
period offer received by the employees
is
known
29
Thus, employees get no
willing to pay.
nothing in this model, as well as in the models of earlier sections,
first
However, both employees are
to the firm.
The reason
is
that
I
the employee gains
have assumed that the
I
now
will
relax this assumption so that, for reasons essentially identical to those in
Roberts (1988), the employees are
Thus, as
in their
increase their
strictly better off
paper, employees would find
own
the firm will tend to favor the employee whose
period value)
is
wages,
it
when
that, both
the firm makes
with probability
—
(1
employees, however,
first
know
their outside offer
its
it
What
equals (z
+
this
profitable.
I
of (z
not necessary for the conclusions,
Here
which obviously requires that A be
a present value oi z
chooses a when (41)
now
by period.
+
+
z), the firm
I
(1
period
that each employees
will let A
The
earlier
be larger.
commit
The
—
A)
to a path
working
at
then ensures that employees stay
in
if
they are
(if
still
the firm offers a present value of
focus on the special case where the former
is
+
prj{
-z)>
X,
strictly positive.
j
=
A,
B
is
z.
more
(44)
The consequence
x to both employees no matter
what
of (44)
its decision.
is
that the firm pays
Thus the
firm once again
satisfied.
contrast this
I
I
first
thus assume that
A(t;{
I
is
the effect of this modification in the case where the firm can
By promising a present value
is
determines
from the beginning. ^^
both period whereas they stay only with probability
While
it
i) with probability A.
of future wages so that both employees earn zi in the second period
the firm).
has the implication that
does know
it
equal to zero.
is
when
decision and
offers.
A) whereas
model thus involves the special case where A
Consider
will entertain also
period value (as opposed to only the second
first
does not know the employees' outside
offer equals z
I
in influence activities to
high.
now assume
I
firm chooses their favored outcome.
advantageous to engage
it
The modification
internal value.
when the
Milgrom and
precommitment outcome with the equilibrium when wages
are set period
concentrate on the case where
X{v{+p{lThis inequality implies that,
additional i to the employee
who
f)vi
in the
is
+ pfz:i-z)<x,
j
= A,B
absence of commitment, the firm
not favored by the decision.
The
is
(45)
better of not paying the
reeison this
is
not worthwhile
^•'Milgrom and Roberts (1988) assume that the employees learn the value of their outside offers after the firm has made its
In this case, the firm could extract the expected surplus that employees get from the decision by charging them for
adopting the course that they prefer. Indeed, if both employees assign the same value to the decision that they favor, the firm
can extract this surplus in full by conducting an auction.
decision.
)
in spite of (44)
is
commitment, the firm only
that, without
probability /. Indeed, (45)
is
gets V2 in the second period with
consistent with (44) as long as Z2
is
sufficiently smaller
Inequality (42) implies that the firm does pay Z2 to the employee that
than
Vj.
favored by the decision
is
so that this employee stays with probability one in the second period. Condition (44) then implies
By
that the firm will pay the additional x to this employee.
employee can only expect a present value of 2
contrast, (45) implies that the other
he stays at the firm.
if
Therefore, profits from
choosing a equal
+
Vi
pvs
while those from choosing
difference
A=
The term
of
-
X){vf
+
p{l
-
/)vf
-
z
+
pfzz]
z-x+{l-
A)[vf
+
p{l
-
f)vt
-
z
+
pfzi]
x
+
{I
between these two expressions
X{vt
)
a with commitment. The
A
is
- vf + p{v^ -vt-{vl-v^)} + p{f+il-
in curly brackets
incentive to choose
-
z
equal
+pvf -
vf
The
-
once again, the expression
is,
last
term says that, just as
because v^ exceeds Kj
.
in (41) that
Finally, the first
additional incentive to favor the employee that provides higher
term
first
commitment
first
desirable to choose
A when
The reason
is
for this
v^ exceeds
Vj
creates an
in (47) says that there
period value. Thus, even
both (41) and (43) are zero so that both employees provide the same values
it is
(46)
determines the desirability
the lack of
in (43),
- vf
f)X){vt
in the
because
A
is
when
.
the following. Choosing
B
an
second period,
a
leads the firm to pay
A
a higher wage in the
period which, in turn, ensures that he stays with probability one in that period. This
than doing the same for
is
more valuable
in the first period.
To gain
is
better
intuition for
the result, consider the choice between two investment project which use either A's or S's talents
intensely once they are completed. Choosing yl's project induces the firm to keep
the gestation period. This benefits
A
in the
form of a higher
to choosing the project that uses B's talents because
period.
31
A
is
A
for sure
during
salary. It also benefits the firm relative
more valuable than
B
during the waiting
)
A
Notice finally that, as long as
makes him
He
strictly better off.
that his outside offer in the
+
now
sure to collect x instead of receiving this only in the event
period pays {z
first
having an expectation of [z
is
does not have to pay for the decision directly, the choice of a
+ x). Thus
But, the question remains whether the firm
him
for the decision.
If
A
for
B
one ignored
The reason
extract anything from A.
is
and
that charging anything
true, the firm
is
probability one.
B
Because
is
is
also benefits
much
if
the expression in (46),
B
his
own
amount
A
is
would be
vf
+
pv2
is
that
equal to
A
2.
can
if
his
if
own
in principle
Suppose
in
exceed
The
last
that
A would
pvf
be unwilling to bid anything
is
+
outside offer equals z
A
If it is,
a
x.
-
for
+
2)
A
x.
But, would he be
would not bid anything
even
for sure
Suppose that
A
Then,
attractive.
in this expression ensures that
The reason he does not bid
of a.
7.
term
+
He would be
not willing to pay anything).
is
if
B
and
v^
/(I
-
is
a even though
he
a because
both equal
fj
is
/3.
while
22
zero so that, with
equal to
- vf
X){vf
can exceed x
for
were to bid x for
addition that the expression in (41)
precommitment, both decisions are equally
A(vf
he
is x.
wage were z? The answer depends on whether
his alternative
larger than x or not.
A=
willing to pay for
offer equals only z (otherwise
that would be unnecessary: the firm would implement
now show
But, precisely
A.
from ^, the firm might be able to gain more by having the two
not willing to bid anything
willing to bid a positive
I
to
*
willing to bid this
A
amount between zero and x
and guaranteeing that the employee stays with
better off paying x
employees bid against each other. The most that
Obviously
by charging
to
employee with probability
this
A
would not be able
clear that the firm
is
it
/?,
x).
able to extract this surplus from
is
implementing a leads to the departure of
because (44)
+
Xx) to being equal to {z
the present value of his salary goes from
in spite of (45).
is
Thus
strictly better off
that the firm has no better choice available to
it is
possible
with the choice
it.
Conclusions
This paper ha^ tackled the question of
with what employees do ex ante
^*By
for
gets
in order to achieve
if the employee does not yet know
having the firm pick a.
contrast,
exchange
who
his outside offer
32
power ex post.
power.
when the
It
has not dealt explicitly
Because power flows to those who
decision
is
made, he
is
wiMing to pay
(1
- X)x
in
supply the firm with the largest value relative to that provided by newcomers,
seeking power should try to maximize this internal value.
One, which
is
less desirable, involves
category
fall activities
information
First,
There are two ways of achieving
incumbent employee can obtain
The
for the firm.
this.
human
other, which
reducing any potential replacement's productivity on the job.
In this
make
essential
(such as the purposeful misplacement of repair manuals) that
difficult to obtain.
Thus, the
ways.
follows that those
desirable from the firm's perspective, involves the accumulation of specific
capital that raises the profits the
is
it
efforts of
employees to change their informational environment can be seen
an employee might acquire information to improve
two
in
his decisions thereby raising his
internal value relative to that of an uninformed outsider. Second, he
may reduce
the information
available to outsiders so the employee's value increases without a corresponding benefit to the firm.
Similarly resistance to a change in formal information systems proposed by top
management can be
seen in these two ways: as an effort to maintain high personal productivity and avoid unprofitable
disruptions or as a prevention of changes that facilitate the acquisition of information by potential
new employees. Thus, the paper
made
consistent with the evidence of
Markus and
Golden Triangle company derailed changes
divisional accountants in the
that would have
is
information systems
information more easily available to the corporate accounting
change would have taken power away from the divisional
profit
commit
to granting
This
maximizing ex post,
nonetheless distort employee actions away from profit maximization ex ante.
the extent to which the firm can
staff.
staff.
These examples show that, while the granting of power may be
may
in
Pfeffer (1983) that
The
issue
is
it
then
power only to those employees whose value
has risen for legitimate reasons. The firm may, for example, establish an ethical code of conduct
and commit
itself to firing
to the firm. This
show
to be useful to
It
even
is
if
is
employees who violate this code regardless of the value that they provide
somewhat
combat
important to
similar to the bureaucratic rules that
influence activities.
stress,
power were allocated
Milgrom and Roberts (1988)
however, that these distortions of employee behavior would arise
efficiently.
For example, they would arise
in
my model
even
if
firms
could determine in advance a schedule that determines each employee's wage as a function of that
employee's internal value. This
is
so even though, in this case, power would be allocated to those
33
most
willing to
(no matter
The
pay
for
The reason
it.
how they do
so)
is
that employees
who
raise their internal value in this setting
can expect to receive a higher income.
money
use of power as opposed to
for the
purpose of compensating important employees
does not create particularly strong incentives for raising one's value at the expense of firm efficiency.
One should thus
interpret this paper as showing that the composition of employee compensation
and, in particular, the extent to which they are compensated with power or with
be profit maximizing. That does not mean that the firm could not do better
if it
money may
could prevent
individuals from taking actions that raise their total compensation without contributing to profits
(See
Holmstrom and Milgrom (1990)
Another extension of
this
examples of such
for
activities).
work that would seem worthwhile
is
to consider
individuals will be given authority in addition to power. In this paper
on the
ability of a person or
that
favors.
it
itself is
for
To analyze
made by
is
this question
I
What
have not dealt with are cases where the authority
I
delegated.
formal authority; one can be
in
wishes without being
officially in
plays no role.
all,
Thus,
it
will
i.e.
have considered a very simple model where the decision
As has been noted repeatedly (See Thompson
After
have focused on power,
group to have top management implement the organizational change
the owner of the firm.
making decisions
I
when groups and
(1956)), one's power need not coincide with
a position to have a particular decision
charge of making the decision. That
is
made according
to one's
not to say that authority
those in authority act as the referees between the competing interests.
sometimes prove administratively expedient to put
in
charge of making decisions
those individuals whose desires will ultimately prevail. But the delegation of authority even to the
employees whose wishes
will prevail
might be problematic.
In particular, the firm
must ensure that
those in authority do not turn around and choose that decision for which employees are willing to
pay them the most.
this
form are
this type
One
between
illegal.
In practice this
may
not be a serious problem because overt side payments of
However, a more thorough analysis of the delegation problem
in
models of
seems warranted.
crucial question that remains
my model and
open concerns the
the view that power
than profit maximization.
My
hope
is
is
feasibility of distinguishing empirically
allocated to particular groups for reasons other
that this paper will give impetus to a search for facts on
34
power distribution that could distinguish between these two views. For instance, the model
clarifies
who
control
that the economic view of the firm
important resources get a
lot of
is
not contradicted by evidence that individuals
power. But,
it
would be contradicted
employee can be replaced by an outsider played no
role. In
if
the ease with which the
other words, evidence that showed power
flowing to readily replaceable individuals with access to important resources would be inconsistent
with the model.
35
8.
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37
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