JLEO, V36, N3 495
Worker Trust in Management and Delegation in
Organizations
Kieron J. Meagher*
Australian National University
Using a unique employee–establishment survey, we find a causal relationship
between an individual employee’s trust of management and their decisionmaking rights (delegation). We utilize both fixed effects (FE) and instrumental
variables to control for unobserved factors: establishment-level FE control for
management quality, practices, culture, and other characteristics; our instruments of inherited trust in management, and trust of equivalent workers in a different but similar country address the possible endogeneity of employee trust.
Across all specifications, we find that delegation to a worker is more likely if that
employee trusts management. In our preferred model, which includes establishment FE and accounts for endogeneity, we find a 1 standard deviation (SD)
increase in employee trust increases delegation by approximately 0.6 of 1 SD.
Our results are robust to the inclusion of worker preferences for individualism
(which favors delegation), incentives/bonuses, and alternative measures of decision authority. (JEL D23, L22, L23).
1. Introduction
According to Arrow (1972), “[v]irtually every commercial transaction has
within itself an element of trust, certainly any transaction conducted over
a period of time.” In this vein, researchers have investigated how trust
(and culture more generally) is related to economic development and
*Research School of Economics, Australian National University, ACT, Australia.
Email: kieron.meagher@anu.edu.au
**School of Economics, University of Sydney, NSW, Australia. Email: andrew.wait@
sydney.edu.au
We would like to thank the following for their useful comments: John Asker, Murali
Agastya, Nicholas Bloom, Federico Ciliberto, Nicolas de Roos, Wouter Dessein, Jed
DeVaro, Guido Friebel, Robert Gibbons, Hajime Katayama, Francine Lafontaine, Bentley
MacLeod, Kristina McElheran, Hodaka Morita, Hideo Owan, Michael Raith, Imran
Rasul, Guillaume Roger, Raffaella Sadun, Stefanie Schurer, Suraj Prasad, Vladimir
Smirnov, John Van Reenen, and participants at Harvard Business School’s 10 Years of the
World Management Survey conference and the Contract Theory Workshop at the
University of Kyoto, 2019.
The Journal of Law, Economics, and Organization, Vol. 36, No. 3
doi:10.1093/jleo/ewaa008
Advance Access published June 13, 2020
C The Author(s) 2020. Published by Oxford University Press on behalf of Yale University.
V
All rights reserved. For permissions, please email: journals.permissions@oup.com
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Andrew Wait**
University of Sydney
496 The Journal of Law, Economics, & Organization, V36, N3
1. See for example Greif (1993); Knack and Keefer (1997); Zak and Knack (2001);
Guiso et al. (2008); Bidner and Francois (2011); Algan and Cahuc (2010); Tabellini (2010);
Gorodnichenko and Roland (2011); Butler et al. (2016).
2. Gulati and Nickerson (2008) find that pre-existing trust between organizations leads
to less formal governance structures and to better performance outcomes in buyer–seller
relationships. Dahlstrom and Nygaard (1995) examine the relationship between franchisor
delegation of decisions and franchisee trust.
3. Also see Mayer et al. (1995) and (Thorelli 1986: 40) for equivalent definitions. Further
diversity of the definition of trust arises in the empirical research. In their survey article,
McEvily and Tortoriello (2011) find 129 different empirical measures of trust (from 179
papers).
4. Indeed, Gibbons and Henderson (2013) argue how well firms are able to delegate and
encourage agents to take profit-enhancing noncontractible actions is at the heart of contemporary explanations of “persistent performance differences between seemingly similar
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growth.1 It follows that trust could also play a role in economic interactions between and within firms.
A large literature has found that interorganization trust, as reported in
surveys, plays an important role in organizational performance (see Cao
and Lumineau 2015 for a survey).2 Within firms, Guiso et al. (2015) and
Brown et al. (2015) find a positive relationship between a firm’s financial
performance and the average integrity/trustworthiness of its managers, as
assessed by employees. Higher national/regional levels of general trust in
a society are associated with larger corporations (La Porta et al. 1997) and
more delegation across plants (Bloom et al. 2012). In this article, we add
to this literature by delving further inside the organization, examining the
relationship between worker trust of management and delegation of decision authority to employees.
What is trust and why does it matter? While noting that there is no universal definition of trust, Rousseau et al. (1998: 395) contend that “[t]rust
is a psychological state comprising the intention to accept vulnerability
based upon positive expectations of the intentions or behavior of another.” Gambetta (2000) suggests “[w]hen we say we trust someone or that
someone is trustworthy we implicitly mean that the probability that he
will perform an action that is beneficial . . . is high enough for us to
consider in engaging in some form of cooperation with him.
Correspondingly, when we say that someone is untrustworthy, we imply
that the probability is low enough for us to refrain from doing so.” This
suggests trust (and distrust) can be thought of as a belief with an associated probability that the other party will do as they promise.3 Inside an
organization, if parties believe the promises made by others, trust facilitates informal agreements (implicit contracts), allowing firms to tap into
productive organizational structures (including delegation) that would
not be possible relying solely on formal contracts. Of course, a firm might
not always want to delegate, but if it does, and it has limited recourse to
formal contractual mechanisms, trust could facilitate delegation when it
would otherwise not have been possible.4
Worker Trust in Management and Delegation in Organizations
497
firms.” Similar ideas are common in the popular business literature, see, for example,
Williams (2013) and (Shockley-Zalabak et al. 2010: 22–23).
5. In the face of incentive conflicts, rational management cannot anticipate a rational
worker will take the desired action if the worker believes the promised incentives will not be
forthcoming. From a game-theoretic viewpoint, there are subtle issues here of higher-order
beliefs, but we shall skip these issues as we are unable to address them with our data.
6. We thank an anonymous referee for this analogy.
7. Arguments about the importance of workers being able to trust management also circulate in the business–practitioner literature. For example, “What To Do When You Don’t
Trust Your Leader,” on Forbes.com, argues bosses need to work at being trusted by their
subordinates in order to foster a productive work environment.
8. Hong et al. (2019) and Flores-Fillol et al. (2017) both study similar aspects of individual autonomy and influence.
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This study utilizes a unique employee–establishment dataset, the
Australian Workplace Industrial Relations Survey 1995 (AWIRS95), to
investigate a particular type of trust—specifically worker trust of management—and delegation of decision-making authority in organizations. As
detailed in Section 2, this cross-industry survey of randomly selected
establishments has several benefits. First, employees were asked whether
management can be trusted to tell things the way they are, allowing our
focus to narrow down on the worker/management trust relationship, rather than having to rely on a general measure of trustworthiness in society. This is an advantage, as trust has been shown to be context specific
(Glaeser et al. 2000; Sapienza et al. 2013). In our data, interestingly, there
is considerably more variation of worker trust within establishments than
there is of average worker trust between establishments. This suggests
that there are high- and low-trust individual employee–management relationships rather than simply high-trust and low-trust establishments.
Another key feature of this study is its focus on worker trust of management, as opposed to management trust of their subordinates. Figure 1
illustrates both management trust in workers (Panel a), and individual
worker trust in management (Panel b). Management trust of a worker is
undoubtedly important; if management believes that a worker is untrustworthy, they would not delegate authority to her (assuming there is no recourse to formal sanctions to mitigate these agency issues). However,
worker trust in management is also crucial, particularly when contracts
are incomplete. For instance, if a worker places little credence on management’s promises, she will have scant impetus to fulfill any implicit obligation. This, in turn, renders (informal) delegation untenable.5 In this way,
much like the O-ring theory of production,6 we contend that worker trust
of management is of the same order of importance as management’s trust
of subordinates; if either type of trust is absent the possibility of an informal agreement breaks down.7
AWIRS95 also provides information on the delegation of decisionmaking to each worker about: the type of work they do; how they do their
work; when they start and finish; the pace of work; how the establishment
is organized and influence over decisions that affect them.8 To capture the
498 The Journal of Law, Economics, & Organization, V36, N3
(a)
(b)
...
delegation of authority to each worker, we collate these six measures of
decision-making and generate a standardized z-score, similar to the technique used by Bloom et al. (2012). An advantage of focusing on these
lower-level (smaller and less structural) day-to-day decisions is that they
are more likely to rely on informal (trust-based) agreements than larger/
structural decisions; this provides us with potentially useful insight into
the role of trust in organizations.
Our measure of decision authority shows some interesting patterns.
Typically workers have more authority regarding decisions about the type
of work, how they do their work and the pace of work than over decisions
relating to the organization of the establishment and decisions that affect
them. As with trust, there is considerable variation in employee delegation
both within and between establishments; this again validates our approach of focusing on individual employees.
1.1 Results
We find a significant relationship between employee trust and delegation
of decision authority. This estimated relationship, however, is subject to
several complicating factors. First, establishment-level processes, managerial styles, human resource management techniques, and the like could
affect the allocation of decision-making authority (Ichniowski et al. 1997,
Ichniowski and Shaw 2013; Caroli and Van Reenen 2001). To control for
these unobserved influences, we include establishment-level fixed effects
(FE). Our results suggest that the FE are significant and explain a similar
amount of the variation in delegation as individual employee characteristics (gender, education, age, tenure, and occupation). It is worth noting,
however, that omitting establishment-level FE tends to overstate the relationship between human capital factors and delegation. Crucially for this
study, after controlling for establishment-level FE, the significant relationship between trust and delegation remains.
As discussed further below, there is also a potential endogeneity issue
between trust and delegation. For example, if an agent is delegated
decision-making rights, she might be more likely to trust management.
Relatedly, there could be issues of common factor survey bias or omittedvariable bias. To control for these, we adopted an instrumental variables
(IV) approach. A strength of the study is that we have two alternative
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Figure 1. Trust in Organizations. (a) General Trust by Management, (b) Individual Trust of
Management.
Worker Trust in Management and Delegation in Organizations
499
9. We use the term “social norms” broadly to cover the closely related ideas of culture
and social capital also discussed in the literature.
10. We thank an anonymous referee for suggesting this identification strategy.
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instruments, each of which works through independent channels. The first
instrument is the average trust in management by the employee’s country
of origin, excluding the individual worker and anyone at their establishment. This instrument relates to the transmission of social norms relating
to trust through inheritance.9 Experiments on the trust game of Berg et al.
(1995) have shown the presence of trust varies significantly across countries (Camerer 2003: 87) and on the nationalities of the participants
(Glaeser et al. 2000). Our second instrument adapts the identification
strategy of Acemoglu et al. (2007). They create a measure of the dispersion
of productivity growth among British firms to instrument for their French
counterparts. Here, we instrument for worker trust in AWIRS using its
UK equivalent, matching on four-digit occupation categories.10
Both of our instruments perform well and suggest an endogenous relationship between employee trust of management and delegation. Further,
our IV estimates strengthen the estimated relationship between trust and
delegation. Accounting for both establishment FE and endogeneity—our
preferred model—a 1 standard deviation (SD) change in employee trust
of management increases delegation by approximately 0.6 of 1 SD.
Notably, also, our identification strategy is robust to including each instrument separately or together, and even for controlling for an employee’s country of origin and for joint occupation-establishment FE. We
continue to find a positive and significant relationship between employee
trust of management and authority when using alternative ordinal measures of decentralization for each of the decision types separately (Section
3.3.1).
We consider several extensions. Workers will naturally differ in their
preferences about job characteristics and there is the possibility that the
delegation patterns observed reflect these preferences; for example, managers might delegate more to those employees who have a strong preference for autonomy. To control for this, we use the cross-country measure
of individualism constructed by Hofstede (2001). Accounting for the preference for individualism of the worker’s country of origin, the relationship
between trust and delegation remains. This gives us confidence the estimated trust/delegation relationship captures more than just worker preferences for delegation. Delegation could also reflect the ability of
management to use formal contracts and incentives (Hong et al. 2019).
Reassuringly, the estimated trust/delegation relationship is robust to the
inclusion of whether the worker was paid a bonus or an incentive payment. This is consistent with the idea that formal incentives and (informal)
trusting relationships are both factors facilitating delegation.
Furthermore, looking at specific subsamples, our trust/delegation results
500 The Journal of Law, Economics, & Organization, V36, N3
hold for the services sector in isolation, the manufacturing and mining sectors, and if we exclude any worker with a (middle-level) managerial role.
1.2 Related Literature
11. See Malcomson (2013) for survey on relational contracts and the relationalcontracting models of Baker et al. (1999, 2002), Levin (2003), and Li et al. (2017). Also see
Gibbons and Henderson (2013). For empirical evidence of relational contracts, see
Macchiavello and Morjaria (2015) and Gil et al. (2019).
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We draw on several rich streams of literature. Trust is a key concept in
this study. According to Sako and Helper (1998), trust could indicate that
a transacting party is sufficiently competent that they will be able to complete what was promised and not to take unfair advantage. In many ways,
trust could reflect a situation when both parties adhere to a relational contract, as in the trust game of Kreps (1990), in which parties “trust” one another to fulfill their implicit obligations. MacLeod (2007) suggests that
“[i]n a relational contract, one party trusts the other when the value from
future trade is greater than the one period gain from defection.”11 In this
way, the discount factor can be interpreted as a measure of trust (Felli
et al. 2019). What is important in these models is that both transacting
parties adhere to their relational-contracting obligations; in our context,
that means that the workers (and their belief regarding the management’s
incentives to cheat or cooperate) are just as important as a worker’s trustworthiness in the eye of management. Aghion et al. (2017a) interpret trust
as the congruence parameter in the formal- and real-authority model of
Aghion and Tirole (1997). They suggest “[f]inding empirical proxies for
the congruence parameter is challenging but one possibility is to use measures of trust” (Aghion et al. 2017a: 148). In many ways, the congruence
parameter, capturing the mutual interests of the transacting parties, could
be thought of as a reduced-form measure of the payoffs and the discount
factor in a repeated game. Alternatively, trust could relate to a belief (or
reputation) regarding the other party’s type (Chen 2000; Cabral 2005).
Regardless of its source, Gambetta (2000) and Felli et al. (2019) suggest
higher trust is associated with a lower probability of opportunistic
behavior.
This economic, rather prosaic, interpretation of trust used by Felli et al.
(2019), Macchiavello and Morjaria (2015) and others is not to suggest
that other social or psychological factors are not important. Generalized
societal-level trust has been linked to delegation of decision-making.
Using the World Values Survey measures of societal trust, Bloom et al.
(2012) find delegation to a plant from headquarters (HQ) is more likely
when the HQ is located in a high-trust region, and when the plant subsidiary is in a region considered more trustworthy by the HQ’s region; also
see Aghion et al. (2017a: Section 3.2). Adopting a similar approach,
Asuyama (2020) relates regional-level measures of self-centeredness to
Worker Trust in Management and Delegation in Organizations
501
12. For other related studies of higher management/establishment delegation, see
Colombo and Delmastro (2004; for labor-versus-capital-related decisions), Acemoglu et al.
(2007; closeness to the technology frontier), McElheran (2014; adaption-versuscoordination of IT purchases), Meagher and Wait (2014; external product–market factors),
Aghion et al. (2017; delegation to plants and performance in the Great Recession), and
Dessein et al. (2018; location uncertainty and coordination).
13. The LMX literature focuses on psychological elements of the leader/worker relationship, and how it influences employee perceptions of their job including commitment, turnover intentions, psychological empowerment, and job satisfaction (Dulebohn et al. 2012:
1717).
14. In this context, worker trust of management relies on several key elements: (a) clarity—the parties involved must be able to clearly communicate (and understand) what each
party is promising to undertake and (b) commitment—if an implicit agreement is to be
believed, any promises made must be credible.
15. As previously mentioned, Dahlstrom and Nygaard (1995) examine the relationship
between centralization of decision-making by the franchisor and franchisee trust in gas stations in Poland, the former East Germany, and Norway, and franchisee perceptions of the
franchisor’s performance. Our study differs in that we examine worker authority within an
establishment, which in turn means we can control for establishment-level FE. Moreover,
our IV approach allows us to control for endogeneity.
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lower levels of decentralization.12 These papers, and studies like La Porta
et al. (1997), show how societal-level trust (culture) can be important in
shaping the business environment and hence the structure of firms. We
combine these two perspectives of trust: our interpretation of trust is consistent with the game-theoretic perspective outlined above; we also, however, consider other factors, such as inherited culture that could influence
a worker’s propensity to trust management.
While inspired by the seminal societal trust/HQ-plant delegation paper of
Bloom et al. (2012), this study differs in several crucial aspects. First, our
measure of decision-making focuses on the individual worker’s decisionmaking authority, as opposed to delegation to a plant in Bloom et al. (2012).
Consequently, our study is at a finer grain in terms of decision-making rights
and allows for heterogeneity within establishments. Secondly, as emphasized
by the leader–member exchange (LMX) literature, psychological aspects of
the dyadic relationships between a worker and management are potentially
important.13 Following this, we study trust/delegation at the individual employee level, rather than using measures of trust in society and between
regions. Finally, Bloom et al. (2012) focus on management trust of agents
(captured by HQ region trust of the subsidiary’s region); our focus is on agent
trust of management. Without an enforceable contract, it is this trust that
will influence the choices a worker makes in response to a promise (or a
threat) by management. As a consequence, trust determines the credibility of
implicit incentives and punishments and henceforth the attractiveness and
feasibility of delegating authority.14 Furthermore, unlike most analysis in
management/social psychology—see, for example, the LMX meta-analysis
of Dulebohn et al. (2012)—our analysis explicitly models worker trust as a
determinant of delegation, and accounts for both establishment-level FE and
endogeneity.15
502 The Journal of Law, Economics, & Organization, V36, N3
2. Dataset and Variables
We use the AWIRS95, a sample of 2001 establishments with 20 or more
employees covering all major industry groups, with the exception of agriculture, forestry, fishing, and defense. It also includes a sample of 19,155
employees, randomly selected from the establishments surveyed.18 These
data were collected by the Australian Government Department of
Employment and Workplace Relations (formerly the Department of
Industrial Relations).
This article utilizes data from the General Management Questionnaire,
conducted by personal interview and completed by the most senior manager at the establishment, and the Employee Questionnaire, administered
to a randomly selected sample of employees from the surveyed establishments.19 As noted above, AWIRS95 has several compelling attributes.
This dataset provides a rich description of workers’ authority over a range
of decisions, and their trust of management. This level of detail regarding
worker autonomy and trust is not available elsewhere, including in the
updated version of AWIRS itself. As a consequence, this data source
remains relevant, despite its age, as it allows us here to produce new empirical results and insights. Another advantage of the AWIRS95 data is
that it was a carefully designed and implemented survey to reflect the
16. Also see Frank and Obloj (2014) and Larkin (2014), for examples, of the potentially
nuanced relationship between sales and incentives.
17. For studies on delegation and incentives, also see DeVaro and Kurtulus (2010),
DeVaro and Prasad (2015).
18. AWIRS was a government-run survey so establishments were randomly selected
from the Australian Bureau of Statistics Business Register. Two thousand and forty seven
establishments were identified to give the 2001 responses. The survey and the data are
described in detail in Morehead et al. (1997).
19. We use the terms worker and employee interchangeably to describe the respondents.
This group can include low-level managers but not senior establishment management who
we refer to generically as “management.”
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As noted above, we include a dummy if a bonus or incentive was paid,
as a robustness check of our trust/decentralization estimates. Previously,
Lo et al. (2016) find that delegation on pricing decisions is more likely
when the salesperson is experienced and capable, and when there are
stronger incentives in place.16 Our approach is complementary to this,
and other “insider econometric” Salesforce studies, in that our focus on
delegation is broader than sales or delegation of authority to discount
price, and we have a broader coverage, analyzing cross-industry data. In a
related study, Hong et al. (2019) use Canadian establishment-level data to
show that the use of performance pay is associated with the delegation of
authority from the principal/owner to managers, but also with the centralization of authority away from nonmanagerial employees. An important
difference between Hong et al. (2019) and our study is that, as well as the
inclusion of employee trust, we are able to control for establishment FE.17
Worker Trust in Management and Delegation in Organizations
503
2.1 Decentralization of Decision-Making: Dependent Variables
Employees were asked “[i]n general, how much influence or input do you
have about the following? The type of work you do; How you do your
work; When you start and finish work; The pace at which you do your
job; The way the workplace is managed or organised; Decisions which affect you at this workplace.”20 For each of the six questions, the possible
responses were (a) a lot; (b) some; (c) a little; or (d) none.21
Each of these questions captures related, but different, aspects of the
decentralization of decision authority. Figure 2 shows the influence
employees have over these various aspects of their work. In general,
employees have more influence over how they do their job and the pace of
work than the way the establishment is organized or about decisions that
affect them at the establishment.
To make use of this information, we generate a variable
Decentralization, by reverse scoring and summing the scores across all six
questions and creating a z-score with a mean of 0 and a SD of 1; higher
values of this variable indicate greater decentralization or employee influence. The recent study of Flores-Fillol et al. (2017) combines various
aspects of worker autonomy and decision authority into a z-score. Bloom
et al. (2012) also utilize a z-score index of decentralization. Hong et al.
(2019) consider the allocation of decision-making rights between principals, senior managers, and nonmanagerial employees relating to 12 operating tasks with some similarities to those considered here. Further to
this, our measure of worker decision-making complements the focus on
the allocation of authority between higher management levels and establishments studied in Colombo and Delmastro (2004), Acemoglu et al.
(2007), Bloom et al. (2012), and McElheran (2014).22 As an alternative
20. The first four questions have their origin in Hackman and Oldham (1975) and have
been extensively used over the last four decades. The statistical validation of these questions
as a single measure (of authority), and their distinctness from empowerment, is covered in
Spreitzer (1995). See Thomas (1990) for a discussion of why delegation of decisions more
generally, questions five and six, are also an important component of what economists call
authority (and which he refers to as “locus of causality”).
21. Of the employees, 0.1% responded “Don’t know.”
22. While there is some subjectivity in these questions, previous studies have also relied
on surveys with subjective questions. For example, Acemoglu et al. (2007) use subjective
answers on establishment’s autonomy regarding investment, and on manager’s autonomy/
authority regarding employment decisions. Similarly, the measure of delegation in
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structure of the broader economy conducted by a government department; the response rates for the main survey were 80% (Morehead et al.
1997). Furthermore, like the United States, Australia has a flexible labor
market and relatively little interference from unions in the way firms are
managed. This means that the observed allocation of decision-making is
(more) likely to arise from the optimizing choices of firms, as opposed to
being externally imposed by labor market institutions.
504 The Journal of Law, Economics, & Organization, V36, N3
50
Percentage
20
30
1
2
3
4
Influence
Workplace Organization
40
2
3
4
Influence
Decisions That Affect You
1
2
3
4
Influence
0
0
0
10
Percentage
10
20
Percentage
20
30
Percentage
20
30
10
1
30
Pace
40
0
0
10
10
Percentage
30
20
10
0
2
3
4
Influence
1
2
3
4
Influence
1
2
3
4
Influence
Figure 2. Delegation of Decision Authority. Key: 1—A lot, 2—Some, 3—A Little, 4—None.
dependent variable, we conduct a factor analysis of the six aspects of
decision-making autonomy; the first factor has an eigenvalue of 2.986,
whereas the other factors have eigenvalues of 0.303 or less. Retaining the
first factor as our decision-making variable yields almost the same results
(unsurprisingly given its pairwise correlation with Decentralization is
0.995). For the sake of brevity, these results are not reported. Finally, unlike previous studies, we have sufficient sample size to repeat our analysis
for each of the individual decisions. We do this as robustness check in
Section 3.3.1.
Table 1 provides summary statistics for the main variables of interest,
including the dependent variable Decentralization. Table 2 outlines the
pairwise correlations between the key variables.
2.2 Explanatory Variables
2.2.1 Employee Characteristics.
Employees were asked whether “[m]anagement at this workplace can be trusted to tell things the way they are.”
Using this information, we generate a measure of Trust(binary) equal to 0
if the employee disagrees with the statement and 1 otherwise. From this,
we also create z-Trust, which is constructed from an employee’s
Trust(binary) by subtracting their establishment’s average Trust(binary)
and then standardizing.
Colombo and Delmastro (2004) is based on subjective answers from the establishment manager. Also, see the subjective measures used in Guiso et al. (2015) and Brown et al. (2015).
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1
Start and Finish
40
How to do Work
Percentage
20
30
40
40
Type of Work
Worker Trust in Management and Delegation in Organizations
505
Table 1. Summary Statistics for Estimation Sample (N ¼ 16,797)
Mean
SD
Decentralization
Type of work
How do work
Start/finish times
Pace of work
Management/organization
Decisions affect you
Key explanatory variables
Trust
Male
Tenure
Tenure2
Age
Instruments
Inherited Trust
Promises Broken (UK)
Additional variables
Individualism
Bonus (binary)
0.009
2.300
1.799
2.551
2.044
2.975
2.706
0.994
1.051
0.930
1.206
1.054
1.049
0.994
0.663
0.561
6.269
85.855
37.226
0.473
0.496
6.823
181.286
11.323
0.667
0.061
0.025
0.041
0.012
0.208
0.911
0.406
Note: Age interpolated at category midpoints.
Source: AWIRS95, WERS2011.
Table 2. Correlations Between Key Variables (N ¼ 16,797)
Variable
Decentralization
z-Trust
Male
Tenure
Inherited Trust
Promises
Broken (UK)
Type of work
How do work
Start finish time
Pace of work
Establishment
organization
Decisions that
affects you
Decentralization zTrust
Male
Tenure
Inherited Promises
Trust
Broken (UK)
1.000
0.222
0.027
0.024
0.024
0.133
1.000
0.027
0.042
0.038
0.045
1.000
0.159
1.000
0.019 0.001
0.157
0.087
1.000
0.039
1.000
0.793
0.770
0.733
0.739
0.767
0.165
0.134
0.126
0.144
0.212
0.024
0.007
0.011
0.018
0.069
0.035
0.018
0.003
0.005
0.043
0.023
0.013
0.039
0.004
0.043
0.106
0.096
0.145
0.076
0.096
0.764
0.238
0.033
0.014
0.008
0.080
Sources: AWIRS95, WERS2011.
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Variable
506 The Journal of Law, Economics, & Organization, V36, N3
3. Empirical Results
Figure 3 highlights some of the important features of Trust(binary) and of
our dependent variable Decentralization. The top left-hand panel in the
Figure plots the distribution of Decentralization with the normal distribution overlaid. This, along with Figure 2, shows there is substantial variation in decision-making authority across employees.
The second panel, in the top right-hand corner, plots the distribution of
average establishment-level Trust(binary). Since it is a binary variable, the
average of Trust(binary) within an establishment is the proportion of
employees who trust management. It is evident that within most establishments there is considerable diversity in opinion, suggesting trust is an individual, rather than an establishment, characteristic. This again highlights
a significant advantage of our employee-level approach.
The lower left-hand panel of Figure 3 shows the kernel density plots of
the within-establishment variation (the dotted line) and the betweenestablishment variation (the black line) of Decentralization.23 While both
densities are centered around 0, the within-establishment distribution has
a greater variance than the between-establishment distribution. This suggests there are not simply decentralized or centralized establishments; rather, there are important differences in decision-making authority/
autonomy within establishments.24
The final panel, in the bottom right-hand corner of Figure 3, highlights
the key relationship between Decentralization and employee trust of management. It shows the kernel density of Decentralization for employees
who trust management (indicated by the blue line) and for employees who
do not (the red line). This shows there is less delegation to employees who
do not trust management. We analyze this key relationship further below.
3.1 Multivariate Analysis
As a first pass, we estimate an OLS regression: Table 3 outlines the estimated coefficients for z-Trust and the other key explanatory variables of
23. The within-establishment densities are calculated after subtracting the establishment
mean. The between-establishment density compares establishment means.
24. A range of levels of autonomy/empowerment among similar workers doing similar
jobs in the same organization has been observed elsewhere, notably by Spreitzer (1995).
Also, see Hackman and Oldham (1975).
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We create a dummy variable if an employee is Male (1) or otherwise (0).
Variables were created indicating each employee’s Tenure and their tenure
squared (Tenure2) at the establishment. Dummy variables are generated
for the employee’s age, an employee’s highest level of education and their
occupational group. Appendix Tables A1 and A2 show the frequencies
for education and occupations categories, plus their respective pairwise
correlations with Decentralization and z-Trust.
507
.5
0
0
0
Decentralization
1
2
-4
-2
0
2
Decentralization
4
0
.2
.4
.6
Average plant trust
.8
-2
-1
0
1
Decentralization
1
.1
0
0
.2
Density
.4
.6
Density
.3
.2
.4
-1
.8
-2
Within
Between
Trust
2
No trust
Figure 3. Decentralization and Employee Trust.
interest.25 Model 3(1) includes only z-Trust as an explanatory variable.26
Model 3(2) shows the OLS estimates with controls for education, employee
age, and occupation controls (without trust as an explanatory variable).
Model 3(3) includes all of these controls. While not implying causality, these
results provide some interesting insights. Focusing on Model 3(3), the estimates show z-Trust positively associated with Decentralization. In other
words, while controlling for other individual-level characteristics (gender, tenure, education, age, and occupation), the key insight from Figure 3 holds; individuals who trust management have on average more decision-making rights.
A few other results are worth noting. The estimated coefficient for Male is
positive and significant—males are more likely to be delegated decisionmaking rights, other things equal. In addition, the estimated coefficients for
Tenure and Tenure2 show a positive and convex relationship with
Decentralization; employees with longer service have more decision-making
authority. Tenure is typically interpreted as a (coarse) proxy for the accumulation of an employee’s firm-specific human capital; tenure allows an employee to accumulate the requisite specific information to make effective
decisions. Tenure could play other roles too; not least, tenure could be related
to the development (and enforcement) of a relational contract, helping shape
25. SEs are clustered at the establishment level which removes the influence of any heteroskedasticity arising from demeaning at the establishment level.
26. We adopt the numbering convention for the different estimation models of Table
number (column number).
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.1
Density
1
1.5
Density
.2
.3
2
.4
2.5
Worker Trust in Management and Delegation in Organizations
508 The Journal of Law, Economics, & Organization, V36, N3
Table 3. Decentralization and Employee z-Trust: OLS and Establishment-Level FE
Estimates (Establishment-Clustered SEs in Parentheses)
Variable
(1)
OLS
0.220***
(3)
OLS
OLS
0.044**
0.001
0.075
(0.018)
(0.003)
(0.102)
0.201***
0.047***
0.007**
0.096
(0.007)
(0.017)
(0.003)
(0.101)
0.205***
0.x047**
0.016***
0.308***
(0.007)
(0.018)
(0.003)
(0.106)
0.044
0.134***
0.156***
0.143***
0.144***
0.165***
0.117***
0.177***
(0.038)
(0.038)
(0.039)
(0.039)
(0.039)
(0.040)
(0.044)
(0.048)
0.068*
0.165***
0.184***
0.167***
0.156***
0.161***
0.112**
0.150***
(0.038)
(0.037)
(0.038)
(0.038)
(0.039)
(0.040)
(0.043)
(0.047)
0.003
0.089**
0.098**
0.084**
0.072*
0.086**
0.035
0.089*
(0.041)
(0.040)
(0.042)
(0.042)
(0.042)
(0.043)
(0.048)
(0.051)
0.107*
0.132**
0.106
0.097
0.197***
0.153**
0.173***
0.124
(0.057)
(0.059)
(0.067)
(0.061)
(0.062)
(0.062)
(0.064)
(0.076)
0.107*
0.148**
0.122*
0.120**
0.217***
0.167***
0.195***
0.139*
(0.056)
(0.058)
(0.065)
(0.060)
(0.061)
(0.061)
(0.063)
(0.076)
0.106*
0.125**
0.111
0.125**
0.150**
0.123*
0.169**
0.124
(0.058)
(0.060)
(0.068)
(0.062)
(0.064)
(0.064)
(0.066)
(0.079)
0.025
0.200***
(0.037)
(0.035)
0.033
0.196***
(0.037)
(0.034)
0.009
0.211***
(0.037)
(0.037)
0.407***
0.198***
0.324***
0.652***
1.338***
0.462***
16,797
0.146
(0.031)
(0.038)
(0.037)
(0.037)
(0.033)
(0.102)
0.389***
0.209***
0.326***
0.640***
1.275***
0.448***
16,797
0.186
(0.030)
(0.037)
(0.036)
(0.036)
(0.033)
(0.098)
0.339***
0.209***
0.419***
0.626***
1.183***
0.488***
16,797
–
1770
0.183
0.208
(0.034)
(0.039)
(0.038)
(0.039)
(0.037)
(0.090)
(0.007)
16,797
0.049
(4)
FE
***, **, and *Significant at 1% level, 5%, and 10% levels, respectively.
Notes: Omitted categories: Highest level of education less than Year 10; age between 15 and 20; and occupational
group laborer (and related). For Model 3(4), establishment-level clustered SEs for 1770 plants estimated in parentheses. ruj½i is the SD of the group residuals uj½i . q ¼ ðr
ðruj½i Þ2
uj½i Þ
2
þðrei Þ2
where rei is the SD of residuals of the overall error term ei .
The (overall) Ro2 reported excludes the FE.
relations between a worker and management. Given this, it is infeasible in the
single-equation OLS model to untangle the factors underpinning the positive
relationship between tenure and delegation.
Managements at separate establishments no doubt have their own style,
differ in the related work practices adopted (Ichniowski et al. 1997), and
some will have a greater propensity to delegate than others.27 To account
for these differences, we estimate the establishment-level FE model:
27. Indeed, McElheran (2014) finds differences in the delegation of purchasing authority
to different establishments, even within the same organization.
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z-Trust
Male
Tenure
Tenure2/1000
Age
21 - 24
25 - 29
30 - 34
35 - 39
40 - 44
45 - 49
50 - 54
55þ
Education
Year 10
High school
Basic vocational
Skilled vocational
Assoc. diploma
Undergraduate
Postgraduate
Other
Occupation
Machine operators
Sales and personal
service
Clerks
Tradespersons
Para-professionals
Professionals
Managers
Other
Observations
R2
No. of establishments
Ro2
q
(2)
Worker Trust in Management and Delegation in Organizations
di ¼ b1 ti þ bXi þ uj½i þ ei :
509
(1)
28. This is equivalent, but more concise, than the double-index notation:
cij ¼ b1 dij þ bXij þ uj þ eij .
29. There is no single counterpart of the OLS R2 in the FE model.
30. Taken literally, the FE provide an upper bound on the possible explanatory power
of any observed invariant establishment characteristics.
31. We will discuss further the magnitude of this impact in the following section.
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where di is Decentralization, ti is z-Trust and Xi is a vector of individual
characteristics and controls as described previously. The FE specification
includes a constant uj½i for each establishment j, where the function j½i
identifies the establishment j of which person i is an employee.28 This
model is equivalent to the within-establishment regression, where each observation for each of the variables has its establishment mean subtracted.
The establishment-level FE estimates are outlined in Model 3(4) of
Table 3. This model includes all of the individual level controls and the
FE. The “overall-R2,” denoted R2o , for Model 3(4) indicates that the
observed characteristics of individual employees explain approximately
18.3% of the variation in Decentralization.29 The remaining 81.7% of the
variation is attributed to the FE and the idiosyncratic error term. The
reported q shows that the FE account for approximately 20.8% of this residual 81.7% variation or, in other words, approximately 17% of the total
variation. Thus, for the within-establishment model, the observed individual employee characteristics make a slightly larger, but very similar, contribution to explaining the variation of Decentralization as the
establishment-level FE. Overall, these results show that establishment and
individual employee characteristics are both important for understanding
delegation.30
Model 3(4) shows that controlling for establishment FE, there is a significant positive relationship between employee z-Trust and
Decentralization.31 In other words, while the FE are important, the positive relationship between employee trust and delegation remains.
Compared to the OLS results, the inclusion of the FE has little impact on
the estimated coefficients for Male, whereas the estimates for Tenure and
Tenure2 increase in magnitude in the FE estimates, vis-à-vis the OLS
model. Decentralization increases, on average, with highest educational attainment of the employee, however, these effects are mostly smaller within
an establishment. This suggests that the differences in delegation across
educational levels in the labor market are in part due to sorting: establishments with more highly educated employees are more decentralized on
average. In a similar manner, while Decentralization increases with the age
of the worker, the size of the age dummy variable coefficients is reduced in
the FE model compared with the OLS estimates. Figure 4 shows the percentage error of the OLS estimates for the age and education variables
compared with the FE specification. A sign test (of the OLS versus FE
estimates) shows that failing to account for establishment-level FE leads
510 The Journal of Law, Economics, & Organization, V36, N3
Age
Education
Year 10
25 - 29
High School
30 - 34
Basic vocational
35 - 39
Skilled vocational
40 - 44
Assoc. diploma
45 - 49
Undergraduate
50 - 54
Postgraduate
55+
Other
0
20
40
60
80
100
-10
0
10
20
30
Figure 4. Percentage Error in Coefficient Estimates for General Human Capital Variables
(OLS Relative to FE): Dependent Variable Decentralization.
to a statistically significant pattern of bias, overstating the impact of these
human capital-related variables.
In terms of the occupational variables, as one might expect, managers
and professionals have, ceteris paribus, more delegated decision-making
rights. Furthermore, the estimated relationships between occupations and
Decentralization are largely unaffected by establishment FE.
In summary, while previous studies in the area often could not control
for establishment effects, we can do that here. These FE estimates show a
significant and positive relationship between employee z-Trust and
Decentralization. While not explicitly a test of any particular theory, these
results are broadly consistent with theoretical predictions from relational
contracting and other perspectives. However, we are yet to account for
the potential endogeneity between decentralization and trust—we turn to
this issue now.
3.2 IV: Inherited Trust and Promises Broken (UK)
As is typical, three types of endogeneity are of potential concern: omittedvariable bias, measurement error, and simultaneity. As detailed below, we
use an IV approach to mitigate these issues (Wooldridge 2000; Angrist
and Pischke 2008).
Omitted variables could result in a biased estimate of the trust–delegation relationship. For example, if an individual manager and worker have
a particularly good working relationship, the omitted factor might have a
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21 - 24
Worker Trust in Management and Delegation in Organizations
511
32. Newton et al. (2019) build a model in which closer informal interactions aid coordination in the workplace.
33. See Section 3.3.1 below for a robustness check relating to the construction of our decision authority variable.
34. This last effect is often referred to as the “halo effect” because positive assessments
of one characteristic typically spill over into positive assessments of unrelated characteristics
(Kahneman 2011).
35. CEV is applicable because the Decentralization and z-Trust are both continuous by
construction.
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positive influence on both trust and delegation. Similarly, the work environment for a particular manager and worker might facilitate greater
transparency, perhaps because of some technology or specific production
process in place locally (between the employee and their immediate manager). It could be as simple as location of workstations; closer proximity
might aid communication and strengthen relationships, building both
greater trust and allowing for delegation.32 In any of these scenarios, the
omitted variable could influence both worker trust and delegation of
decision-making authority to the worker. The establishment FE included
in the previous section will not necessarily correct for this bias, especially
if the omitted factor is at the individual employee level.
Measurement error could also impact our estimated results in several
ways. First, there could be noise in the reporting of the questions making
up Decentralization. This noise will be mitigated to some degree by averaging the six questions.33 The impact of the residual noise in the dependent variable is to decrease the goodness-of-fit in our estimation, biasing us
against finding statistically significant results. Secondly, any noise in the
reporting of z-Trust would produce attenuation, biasing its coefficient toward zero. Thus in both of these cases, the potential bias works against
finding a significant relationship between delegation and employee trust.
A measurement error issue that could arise in relation to our subjective
variables is common methods or survey bias. Survey bias can occur if
there exists a common factor that distorts individual responses to the key
subjective questions in the survey. This might be due to the survey itself,
or because of idiosyncratic factors like feeling tired or sick. Another possibility is that an individual may exhibit the psychology trait of making
their responses unrealistically consistent.34 Survey bias as a common factor measurement error problem follows immediately from classical errors
in variables models, see for example Wooldridge (2000).35
Finally, it is possible that there is simultaneity, with both trust and delegation jointly determined in an equilibrium or pure reverse causation,
with management using decentralization to manipulate the trust of workers. While our focus is on the question as to whether higher worker trust
leads to more delegation, we do not want to rule out a priori the possibility
of a simultaneous relationship between the two variables. However, we
believe that our identification strategy, using the IV outlined below, mitigates the potential bias due to simultaneity/reverse causation as much as
512 The Journal of Law, Economics, & Organization, V36, N3
36. Similarly, Guiso et al. (2008) uses an overlapping generations model to suggest that,
while they update from their real-world experience, children strongly rely on their parents in
formulating their priors regarding the trustworthiness of others. They also present evidence
consistent with their intergenerational transmission prediction. Also see Dohmen et al.
(2012), who find that parental willingness to trust others is correlated with their children’s
attitudes to trust.
37. In a different context, Blau et al. (2013) and Fernandez and Fogli (2009) use country
of origin as a proxy for gender-role attitudes.
38. Due to degrees of freedom issues, countries from the same region with small numbers
of employees in the sample are pooled.
39. Given the cross-industry, cross-country nature of our survey, it seems highly implausible that management at one establishment could feasibly know the average trust of
workers by region of origin, at other establishments.
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possible. A great strength of the IV approach is that it deals with endogeneity without having to build a structural model of the form of the
endogeneity.
We have two candidate instruments: employee trust of management by
region of birth (Inherited Trust); and employee trust of management in
equivalent occupations in the UK (Promises Broken (UK)). Let us outline
the intuition underlying each of these instruments now.
An employee’s country of origin potentially affects their trust in management due to the social reproduction of norms, as described by Bisin
and Verdier (2001).36 That is, the institutions and culture of someone’s
birthplace could help shape their trust in others and their overall attitude
to authority—see Bidner and Francois (2011) and Bloom et al. (2012), for
example.37 This gives rise to the persistence of group social norms across
time, as observed empirically by Uslaner (2008), Nunn and Wantchekon
(2011) and in the papers surveyed in Bisin and Verdier (2010). One consequence of this persistence is that immigrants will have their trust determined partly by local experiences, and partly by inherited trust from their
home country. Algan and Cahuc (2010) uses this insight to generate an exogenous measure of general trust in society; we follow a similar method to
generate our instrument. We calculate the average level of trust for
employees, based on country of birth, excluding an employee’s own response and all observations from that employee’s establishment.38 A key
advantage of this instrument—Inherited Trust—is that potential endogeneity between employee trust and delegation within an establishment is
ruled out because an employee’s own establishment is excluded by definition. Thus, there are strong theoretical reasons to believe Inherited Trust
is exogenous in the second-stage regression.39
No instrument is, of course, perfect. One might be concerned that
Inherited Trust is a proxy for race/nationality-based employer discrimination. This seems unlikely since groups typically discriminated against
under the White Australia policy (e.g., the Chinese, Greeks, and Italians)
have higher rates of trust than groups that were favored by race-based
policies (the United Kingdom, New Zeland, and the United States).
Appendix Table A3 shows Inherited Trust and labor market
Worker Trust in Management and Delegation in Organizations
513
3.2.1 IV Results. Tables 4 and Appendix Tables A4 and A6 show our IV
estimates. We discuss each set of results in turn. First, consider the models
in Table 4. The first two columns show the first- and second-stage
GMM2S estimates with no establishment-level FE, using Inherited Trust
and Promises Broken (UK) as instruments. Columns (3) and (4) outline
the first- and second-stage estimates of the establishment FE model, again
both Inherited Trust and Promises Broken (UK) as instruments. Focusing
on this FE IV model, both instruments perform well, each being significant in the first-stage regressions. The coefficients’ signs accord with the
theories presented above: higher Inherited Trust is associated with higher
individual trust, and Promises Broken (UK) is associated with lower predicted employee trust.
The validity of inference on the z-Trust coefficient in the second-stage
IV regressions requires sufficiently “strong” identification (not weak
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discrimination (Junankar and Mahuteau 2005) by country of origin in the
mid-1990s. The size of the correlation is negligible—less than 4%—and
when added to the second-stage regression it is highly nonsignificant with
a p-value of.699.
Our second instrument, Promises Broken (UK), relies on an analogous
identification strategy to the one adopted by Acemoglu et al. (2007). They
instrument for French-industry productivity heterogeneity at the fourdigit industry level using their UK-industry counterparts. We do the same
thing for trust, instrumenting trust in Australian four-digit occupational
categories, using their UK counterparts. The UK-trust data comes from
the Workplace Employment Relations Survey 2011 (WERS2011).
Employees were asked, in relation to their place of work, “[m]anagers
here can be relied upon to keep their promises.” If the employee strongly
disagreed Promises Broken (UK) equaled 1 (0 otherwise). These answers
are averaged for four-digit occupational groups. The intuition underlying
this instrument is that the United Kingdom and Australia are similar
countries, sharing a common history and sufficiently similar industrial
relations institutions so as to yield occupations that are operationally
similar. Thus employees in equivalent jobs are conjectured to face similar
working conditions that influence their trust in management. Adapting
the intuition of Acemoglu et al. (2007), while UK-worker trust in management might be affected by the decision rights they enjoy, this is exogenous
to their Australian occupational counterpart’s decision authority, making
Promises Broken (UK) a valid instrument.
In all, we have two instruments, each with its own origins and separate
channel to our endogenous employee trust variable. Importantly, both
instruments perform well in terms of relevance, rejecting weak instrument
problems. Moreover, given that we have two instruments it is also possible
to estimate Hansen–Sargen overidentified tests. From this, we fail to reject
the null that the instruments are exogenous to the second-stage regressions. Specific test results are given in the corresponding tables below.
(0.203)
(0.021)
(0.007)
(0.218)
(0.052)
(0.052)
(0.053)
(0.051)
(0.046)
(0.047)
(0.051)
(0.063)
(0.064)
(0.069)
(0.079)
(0.074)
(0.074)
(0.073)
(0.077)
0.145***
0.268***
0.276***
0.246***
0.196***
0.151***
0.093*
0.061
0.105
0.201***
0.174**
0.196***
0.280***
0.210***
0.269***
(0.051)
(0.051)
(0.064)
(0.057)
(0.057)
(0.056)
(0.059)
(0.036)
(0.034)
(0.035)
(0.035)
(0.035)
(0.036)
(0.038)
(0.041)
0.122***
0.165***
0.152***
0.133***
0.074**
0.002
0.015
0.121***
0.028
0.065
0.061
0.095*
0.085
0.060
0.110*
(0.016)
(0.003)
(0.110)
0.014
0.031***
0.855***
First stage
IV second stage
0.854***
0.060***
0.027***
0.651***
(2)
(1)
0.111*
0.165**
0.152**
0.192***
0.197***
0.155**
0.223***
0.072
0.181***
0.186***
0.161***
0.119**
0.098**
0.038
0.035
0.614***
0.072***
0.032***
0.724***
(0.062)
(0.066)
(0.076)
(0.072)
(0.071)
(0.071)
(0.075)
(0.052)
(0.052)
(0.054)
(0.053)
(0.049)
(0.048)
(0.052)
(0.059)
(0.137)
(0.023)
(0.006)
(0.188)
FE IV second stage
(3)
(0.022)
(0.003)
(0.126)
(0.045)
(0.045)
(0.046)
(0.046)
(0.047)
(0.047)
(0.049)
(0.053)
(0.059
(0.060)
(0.074)
(0.065)
(0.067)
(0.066)
(0.069)
0.181***
0.234***
0.226***
0.203***
0.131***
0.046
0.019
0.115**
0.015
0.083
0.079
0.142**
0.105
0.073
0.131*
First stage
(4)
0.055**
0.040***
1.022***
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z-Trust
Male
Tenure
Tenure2/1000
Age
21 - 24
25 - 29
30 - 34
35 - 39
40 - 44
45 - 49
50 - 54
55þ
Education
Year 10
High school
Basic vocational
Skilled vocational
Assoc. diploma
Undergraduate
Postgraduate
Variable
Table 4. IV Results for Decentralization (Establishment-Level Clustered SEs in Parentheses)
514 The Journal of Law, Economics, & Organization, V36, N3
17.822**
11.59
0.810
(15%)
(0.044)
(0.037)
(0.039)
(0.045)
(0.041)
(0.045)
(0.074)
(0.108)
0.058
0.183***
0.330***
0.247***
0.330***
0.599***
1.071***
0.404***
16,797
(0.094)
0.186**
(0.074)
(0.034)
(0.028)
(0.027)
(0.037)
(0.031)
(0.036)
(0.037)
(0.085)
(0.297)
(0.199)
0.071
0.027
0.020
0.095***
0.048
0.005
0.069*
0.314***
0.065
1.713***
0.441**
16,797
16,797
1770
23.936**
19.93
0.722
0.028
0.173***
0.285***
0.259***
0.429***
0.582***
1.018***
0.446***
0.164*
(10%)
(0.043)
(0.042)
(0.041)
(0.046)
(0.041)
(0.046)
(0.068)
(0.097)
(0.089)
(0.084)
(0.044)
(0.040)
(0.038)
(0.049)
(0.044)
(0.047)
(0.045)
(0.100)
(0.358)
(0.284)
0.099
0.075*
0.088**
0.139***
0.113**
0.013
0.103**
0.396***
0.097
2.272***
0.904***
16,797
1770
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a
Weak instruments test: Kleibergen–Paap rk Wald F-statistic, H0 ¼ weak instruments. Critical values from Stock and Yogo (2005, Table 2).
***Significant at 1% level, **significant at 5% level, *significant at 10% level. Notes: Establishment-level clustered SEs in parentheses.
Other
Occupation
Machine operators
Sales and personal service
Clerks
Tradespersons
Para-professionals
Professionals
Managers
Other
Instruments
Inherited Trust
Promises Broken (UK)
Observations
No. establishments
Kleibergen–Paap F-statistica
Critical value (max IV size)
Hansen-J p-value
Worker Trust in Management and Delegation in Organizations
515
516 The Journal of Law, Economics, & Organization, V36, N3
40. The critical value is a function of the number of included endogenous regressors (n ¼
1), the number of IV (K2 ¼ 1), and the desired maximal size (r) of a 5% Wald test of b ¼ b0 .
An r of 10% is the strictest level of r reported in Stock and Yogo (2005). The test has a null
hypothesis of weak instruments, see Kleibergen and Schaffer (2007) regarding
implementation.
41. The turning point of the quadratic for tenure is around 20 years. In the estimation
sample, only about 5% of the employees have a tenure of more than 20 years.
42. Breakdown of cooperation on the equilibrium path is a common prediction in
repeated games with imperfect monitoring, for the original development see Green and
Porter (1984); Abreu et al. (1986, 1990). More specifically within organizations, this result is
consistent with Li et al. (2017), who argue that trust tends to deteriorate over time. This is
not an obvious prediction from more behavioral/psychological views of trust.
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instruments). The statistical tests on the appropriateness of the IV approach are given at the bottom of Table 4. For clustered standard errors
(SEs) the appropriate first-stage F-test for the significance of the instruments is the Kleibergen–Paap rk Wald F-statistic (Kleibergen and Paap
2006), as it allows for heteroskedasticity in calculating the matrix rank.
The corresponding critical values are from Stock and Yogo (2005).40 In
the model, the hypothesis of weak identification/weak instruments is
rejected at the 5% level of significance (with an r of 10%), implying that
the standard causal inference on the coefficient for z-Trust should be valid.
Finally, the Hansen test fails to reject the null that the excluded instrument is valid.
The first-stage results for the other controls in Table 4 are economically
interesting in their own right. Staying with the aforementioned FE IV
model (with the first stage outlined in column 4), there are gender differences—males trust less than females. Tenure has a concave relationship with
trust and is negative and decreasing for most employees.41 Thus it appears
that, on average, employees’ trust of management erodes, rather than
being built, over time.42 Trust also tends to decrease strongly with age in
our estimates, however, as this is a cross-sectional dataset we cannot separate aging effects from birth-cohort effects.
Turning to the second-stage (FE) IV estimates (column 3), there is a significant and positive relationship between z-Trust and Decentralization.
Moreover, the estimated z-Trust coefficient in the IV model is larger, compared with the estimates that do not account for endogeneity. The size of
the effects is also economically relevant and plausible: in our preferred (IV
FE) model, a 1 SD increase in z-Trust increases Decentralization by approximately 0.6 of 1 SD. It is also worthwhile to compare the magnitude
of the relationship between z-Trust and Decentralization with other controls. The estimated size impact of z-Trust on Decentralization is roughly
the same as being a professional (relative to a laborer), and larger than
having an undergraduate degree or equivalent (relative to having the highest educational level of less than Year 10 at high school). Calculated at its
mean, a 1 SD increase in a worker’s tenure increases Decentralization by
0.16 of 1 SD. This suggests that the magnitude of a 1 SD increase in
Worker Trust in Management and Delegation in Organizations
517
3.3 Robustness of Results
Here we consider several robustness checks. First, we estimate the trust/
delegation relationship for each of the six aspects of decision-making separately, without imposing linearity. Next, we consider the relationship for
different industry and occupational groups.
43. The years since the survey was conducted have been a period of significant economic
change, and it is useful to think about how major developments might influence our results.
Technological change, and automation, in particular, has removed many routine jobs. This
is likely to have increased both the need/use of delegation and the prevalence of contractual
incompleteness, which is to say the importance and impact of trust are likely to have
increased in these areas. However, in some low-skill areas improvements in IT may have led
to enhanced monitoring and control potentially reducing the need for delegation and implicit contracts. Dissecting these effects is an interesting subject for future research. A second
related change, driven in part by globalization, has been the delayering of organizations to
remove middle management (Rajan and Wulf 2006; Guadalupe and Wulf 2010; Guadalupe
et al. 2014) and the increased use of delegation by exporting firms (Meagher and Wait
2014), which suggests increased importance in understanding delegation to workers near the
bottom of the hierarchy.
44. We thank an anonymous referee for suggesting this line of inquiry.
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z-Trust has approximately four times the impact of a 1 SD increase in
tenure.43
The remainder of the IV results are variations on this theme. For completeness, Appendix Table A4 shows two more models, both without FE.
The first is the maximum likelihood system model where the (endogenous)
dependent variable in the first stage is z-Trust, with Decentralization the
second-stage dependent variable. The second model estimates a probit in
the first stage, using Trust(binary) as the endogenous variable, with
Decentralization as the second-stage dependent variable. The results are
consistent with key results discussed above.
One concern would be that our country-based instrument, Inherited
Trust, is capturing some different country-based factors other than trust.
To explore this, we exclude the country-based instrument, using solely the
occupational-based Promises Broken (UK). This allows us to include
country-of-origin dummy variable controls. As reported in Appendix
Table A5, the key results are robust to this new specification—in fact, the
coefficient on z-Trust increases, albeit slightly—giving us confidence that
Inherited Trust is capturing something related to employee trust, beyond
simply a (generic) country effect.
Finally, we also explore the trust–delegation relationship within occupational groups at a given establishment.44 To do this, we also include occupation-establishment FE (reducing the number of observations
somewhat). In terms of identification, we do not include the occupationderived Promises Broken (UK), instead utilizing Inherited Trust as our instrument. The estimates are shown in Appendix Table A6. Crucially,
again we find a significant positive relationship between employee trust
and Decentralization.
518 The Journal of Law, Economics, & Organization, V36, N3
45. Also, see Dessein and Santos (2006).
46. Colombo and Delmastro (2004) include a set of dummies for capital versus labor
decisions while Meagher and Wait (2014) include dummies for major decisions over technology, plant, process, and organization.
47. Indeed no equivalent of the within fixed effect specification exists for the nonlinear
case.
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3.3.1 Separate Decisions: An Ordinal Approach. As outlined above in
Section 2, our main dependent variable is a composite of six separate
aspects of an employee’s decision-making authority: type of work; how to
do the work; start and finish times; pace of work; influence regarding
workplace organization; and influence on decisions in the establishment
that affect the employee. While the context is different, Dessein et al.
(2016) argue that an organization could establish different rules (and communication practices) for different types of decisions.45 Previous empirical
work on authority and decision-making has largely suppressed the role of
the nature/context of the decision or has included dummy variables to
pick up “intercept” differences.46 Due to the richness of our individuallevel data, we are able to explore the estimated relationship between
decision-making authority and the set of regressors for each of the six
decisions separately.
Each of the decision authority measures is scored on a four-point scale
measuring the amount of influence the employee has over that type of decision/activity: (a) A lot, (b) Some, (c) A little, and (d) None. Rather than
impose linearity in our modeling via the pooled z-score of
Decentralization, here we take an ordinal approach using an ordered probit, reverse coded so that the highest category of each dependent variable
indicates a lot of influence for the employee, whereas the lowest category
corresponds to the employee’s influence being “none.” Consistent with
this ordinal approach, we use Trust(binary) to measure of employee trust.
Each model includes all age, education, and occupation controls. Given
the nonlinearity of the estimation model, it can be problematic to include
FE47; consequently, we exclude the establishment-level FE. We estimate
both: (a) a (single-equation) ordered probit for each of the six decisions
and (b) an IV ordered probit, with the first-stage (probit) instruments of
Inherited Trust and Promises Broken (UK) for Trust(binary).
The estimates for each of the six decisions are reported in Table 5, with
the top section reporting the (single-equation) ordered-probit estimates,
and the lower section reporting the IV results. For the sake of brevity, we
have reported only the key coefficient estimates, although all models contain our standard set of gender, education, age, tenure, and occupation
controls.
For the single-equation ordered probits, all of the estimated coefficients
on Trust(binary) are positive and significant, indicating that employee
Trust(binary) is associated with greater delegation of authority to employees for each of the separate types of decisions. As noted, the lower half of
Table 5 reports the IV estimates. In all cases, adding IV leads to larger
0.515
(0.378)
Yes
2.415***
(0.460)
1.018***
(0.313)
Yes
0.081
(0.232)
16,797
2.660***
(0.405)
0.917***
(0.288)
Yes
0.480***
(0.069)
16,797
0.382***
(0.020)
Yes
16,797
(2)
How
1.208***
(0.103)
Yes
0.455***
(0.019)
Yes
16,797
(1)
Type
0.389***
(0.058)
16,797
2.822***
(0.417)
1.211***
(0.301)
Yes
0.933***
(0.092)
Yes
0.314***
(0.021)
Yes
16,797
(3)
Times
0.245*
(0.138)
16,797
2.445***
(0.427)
1.020***
(0.302)
Yes
0.748***
(0.220)
Yes
0.352***
(0.019)
Yes
16,797
(4)
Pace
(6)
Decisions
0.656***
(0.019)
Yes
16,797
0.821
(0.536)
Yes
2.449***
(0.431)
1.002***
(0.345)
Yes
0.102
(0.335)
16,797
(5)
Org.
0.617***
(0.020)
Yes
16,797
1.276***
(0.102)
Yes
2.833***
(0.417)
0.932***
(0.292)
Yes
0.429***
(0.070)
16,797
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***Significant at 1% level, **significant at 10% level, *significant at 5% level.
Note: All models include controls for gender, education, age, and occupation.
Observations
Demographic, human capital and occupation controls
Wald endogeneity test
H0: Trust not endogenous corr(etrust ; ei )
Promises Broken (UK)
Demographic, human capital and occupation controls
Stage 1: Probit
Inherited Trust
Maximum likelihood system: Ordered probit þ probit
Stage 2: Ordered probit
Trust(binary)
Demographic, human capital and occupation controls
Observations
Ordered probit (single equation)
Trust(binary)
Variable
Table 5. Decision Authority and Employee Trust(binary) for Separate Decisions: Ordered Probit (IV and non-IV) Estimates (Establishment-Level Clustered
SEs in Parentheses)
Worker Trust in Management and Delegation in Organizations
519
520 The Journal of Law, Economics, & Organization, V36, N3
3.3.2 Services, Manufacturing, and Nonmanagers. Here we present two
more robustness checks: (a) an examination of the relationship between
trust and delegation for nonmanagers only and (b) separately reexamining the trust/delegation relationship for the services sector and for
manufacturing and mining industries.
Almost all of the estimates above include all occupational groups surveyed, including managers. While the managers surveyed in the employee
questionnaire of AWIRS are lower-level managers—they are not the general manager of the establishment or head of employment relations, for
example—as a robustness check we re-estimate our preferred establishment FE IV model excluding all employees who nominated themselves as
a manager.48 As shown in Model (1), Table 6, our key results hold; there
48. The concern, of course, could be that managers identify with management at the establishment, making them more likely to trust them. However, note that, as Appendix
Table A2 shows managers have lower trust than every other occupation other than
professionals.
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(positive) coefficient estimates for the effect of trust, qualitatively similar
to the results in the linear models using the single Decentralization index.
One key advantage of combining the six questions into a single index is
the associated reduction in noise. Noise is particularly a problem under
the IV model where SEs are already inclined to increase. As shown, the
instrumented coefficient for Trust(binary) is significant and positive for
four of the six decisions (type of work, start/finish times, the pace of work,
and the organization of the establishment). The other two Trust(binary)
coefficients, for employee authority regarding “how to do the work” and
“decisions in the establishment that affect the employee” while positive
are not significant in the IV specification, despite being larger than in the
non-IV specification. Thus the insignificance is driven more by the exploding SEs rather than the coefficient size.
The Wald test for exogeneity of the first and second stages is rejected for
four of the six decisions, with how to do your work, and decisions at the establishment the two exceptions; technically this suggests Trust(binary) is
endogenous, except for the two aforementioned decisions. For employee
authority regarding “how to do the work” and “decisions in the establishment that affect the employee,” failure to reject the null of exogeneity is
due to low correlations between the errors, but it is hard to know how
much of this is due to attenuation bias from noise. Technically this test suggests that the single-equation estimates better captures these two respective
trust/delegation relationship, which are positive and significant.
In the main, the results for the separate decisions are qualitatively consistent with the estimates for the pooled Decentralization variable, considered above. This robustness to alternative specifications gives us some
additional confidence in our results.
Worker Trust in Management and Delegation in Organizations
521
Table 6. Decentralization and Employee z-Trust for Nonmanagers and in the Services
and Manufacturing and Mining Sectors: IV FE Estimates (Establishment-Clustered SE in
Parentheses)
Subsample
Promises Broken (UK)
Weak instrument test
Kleibergen–Paap F-statisticd
Critical value (max IV size)
Second-stage estimates
(Decentralization)
z-Trust
No. of obs.
No. of clusters
Coeff (SE)
(2)
Service
sectorb
Coeff (SE)
(3)
Manufacturing
and Miningc
Coeff (SE)
2.223***
(0.381)
0.992
(0.303)
1.988***
(0.430)
0.940***
(0.357)
3.005**
(0.647)
–
–
21.38
19.93 (10%)
13.28**
11.59 (15%)
21.577
16.38 (10%)
0.651
(0.146)
15,400
1762
0.508**
(0.172)
12,834
1370
0.845**
(0.236)
3963
400
a
Excluding individuals whose occupation is manager. Establishment-level clustered SEs for 1762 establishments
shown in parentheses.
Excluding establishments in the mining and manufacturing industries. Establishment-level clustered SEs for 1370
establishments shown in parentheses.
c
Including only establishments in the mining and manufacturing industries. Establishment-level clustered SEs for 400
establishments shown in parentheses.
d
Weak instruments test: Kleibergen–Paap rk Wald F-statistic, H0 ¼ weak instruments. Critical values from Stock and
Yogo (2005, Table 2).
***Significant at 1% level, **significant at 5% level.
Notes: All models are equivalent to the FE IV model in Table 4, columns (3) and (4), with a full set of education, age,
and occupational controls.
b
remains a positive and significant relationship between z-Trust and
Decentralization.
AWIRS, as a cross-industry survey, includes establishments from mining, manufacturing and the services sector. While we have included FE to
control for establishment effects, no doubt technical requirements will differ across different industries; for example, technical reasons might dictate
that someone working in manufacturing has less autonomy over the pace
of work or the time they start than an employee in some roles in the services sector. To account for these possible issues, we re-estimate our preferred FE IV model for services sector establishments only (excluding any
establishment from the mining and manufacturing sectors), and for establishments in either the mining and manufacturing sectors. These results—
reported in Table 6—are very similar to the estimates obtained using the
full sample, reaffirming the estimated relationship between z-Trust and
Decentralization.
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First-stage estimates (z-Trust)
Instrument
Inherited Trust
(1)
Nonmanagersa
522 The Journal of Law, Economics, & Organization, V36, N3
4.1 Individualism: Taste for Autonomy
Our approach in previous sections emphasized a contract theory/repeated
game approach to trust and decision-making, which typically assumes
that an employee has preferences over effort and outcomes. However, an
employee might care about the process, their self-determination, and individual freedom. This, in turn, might manifest as a preference for delegated
authority in the workplace. Consequently, the observed patterns of delegation might reflect different worker preferences for autonomy, rather
than the postulated trust/delegation relationship.
Unfortunately, AWIRS95 does not contain a direct measure of preferences for individualism. Even if such a variable did exist, it could plausibly be
affected by the same types of measurement error and endogeneity that we
have shown is an issue with the direct measure of employee trust. Instead,
we take a different approach. The landmark study of Hofstede (2001) shows
that there are important differences in preferences between countries relating
to attitudes about culture and values, and the perceptions regarding the role
of supervisors and subordinates in organizations. Previous studies in economics, such as Bloom et al. (2012), have utilized this study’s Power
Distance Index. In this article, we focus on the study’s direct measure preferences for autonomy at work. Individuals were asked (Question A.13) “[how]
important is it to you to: [h]ave considerable freedom to adopt your own approach to the job?,” with possible answers ranging on a Likert scale (1–5)
from “of utmost importance to me,” to “of very little or no importance.”49
Using this information, Hofstede (2001) creates a country-level individualism preference index (Exhibit A3.1). Note, this index of individualism is
lower for countries such as the United States (suggesting stronger preferences for individualism), and higher for countries like Italy and Japan.
As with Inherited Trust, we contend that inherited social norms from an
individual’s country of origin could influence their attitude to individualism or autonomy. Using the Hofstede (2001) index described above, we
generate a variable Individualism, which is the score attributed to each
country by Hofstede, reverse coded (so that higher score indicates a
greater preference for autonomy), standardized by generating a z-score.50
Each individual worker was then assigned a score for Individualism based
on their county of birth.
49. See Hofstede (2001, Chapter 5, Appendix 1).
50. Missing countries are coded as 0—the population means. This coding has no substantial effect on the results.
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4. Extensions: Individualism and Incentives
In this section, we consider two extensions to the framework presented
above, specifically including a measure for an individual’s preference for
autonomy, and whether or not the individual was paid a bonus. While
these extensions provide more evidence of robustness, they are of interest
in their own right.
Worker Trust in Management and Delegation in Organizations
523
4.2 Incentives: Bonus Payments
As argued, in an incomplete-contracting environment, trust could play an
important role in inducing cooperative behavior. However, if formal contracts are feasible, delegation might be sustained in the presence of an
agency problem through a legally enforceable bonus or incentive scheme.
This would make trust less important.
To try to examine this possibility, we include a variable as to whether
an individual worker received a bonus or incentive related to their job performance at the establishment in the 12 months. Bonus is standardized,
after subtracting the establishment mean for each employee.51 As shown
in Table 7, Bonus is included in the second stage of the FE IV model, both
without and with Individualism (columns (3) and (4) and (5) and (6),
respectively).
The results suggest that the payment of a bonus or incentive is associated with Decentralization. This is consistent with previous results on incentive schemes and delegation in Lo et al. (2016) and Hong et al. (2019),
for example. We are nonetheless cautious about this variable, as it has several limitations. For instance, we only know if a bonus payment was made
to a worker, and not whether an incentive contract (implicit or explicit)
was in place over the period. Crucially, though, the estimated relationship
between z-Trust and Decentralization is robust to its inclusion, which provides us with additional confidence regarding the robustness of our
results.52
51. Demeaning has no impact on the within FE results since the within estimate is calculated by demeaning the data before estimation.
52. For robustness, we also estimate the model outlined in columns (1) and (2) from
Table 7 separately for workers who received a bonus, and for those who did not. For workers who received a bonus the z-Trust coefficient is 0.600 with a clustered robust SE of 0.368,
whereas for workers who did not receive a bonus the coefficient is 0.577 (clustered robust
SE of 0.158). Notably, there is no statistically significant difference between the z-Trust coefficient estimate for either subsample, or compared with the coefficient for the full sample.
Consequently, we find no evidence that the explicit incentive payments crowd out the use of
implicit relationships/trust. We are, however, cautious about this approach because the
combination of IV estimation and a relatively small subsample (only 18% of our sample
received a bonus) lead to somewhat imprecise estimates (large SEs).
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We include Individualism directly in the second stage of our FE IV
model. The estimates are shown in columns (1) and (2) and (5) and (6), the
latter including Bonus, discussed below.
As expected, a preference for individual autonomy is related to higher
levels of Decentralization; this effect is statistically significant but relatively
small compared with the other key explanatory variables. Importantly,
however, the estimated coefficients on z-Trust are hardly affected by the
inclusion of Individualism, compared for example with the FE IV results
in Table 4, suggesting that our results are not solely capturing worker
preferences for autonomy.
(0.051)
(0.052)
(0.054)
(0.052)
(0.048)
(0.048)
(0.052)
(0.059)
(0.062)
(0.065)
(0.075)
(0.071)
(0.070)
(0.070)
(0.074)
(0.089)
0.069
0.178***
0.183***
0.158***
0.118**
0.100**
0.040
0.041
0.114*
0.166**
0.153**
0.193***
0.197***
0.155**
0.221***
0.161*
0.017
0.080
0.077
0.139**
0.103
0.072
0.130*
0.100
(0.059)
(0.060)
(0.074)
(0.066)
(0.067)
(0.066)
(0.069)
(0.084)
0.180*** (0.045)
0.233*** (0.045)
0.225*** (0.046)
0.202*** (0.046)
0.130*** (0.047)
0.043 (0.047)
0.017 (0.049)
0.117** (0.053)
0.109*
0.167**
0.154**
0.187***
0.198***
0.157**
0.226***
0.161*
0.069
0.181***
0.186***
0.161***
0.122**
0.100**
0.041
0.040
0.611***
0.050***
(0.023) 0.055** (0.022) 0.070***
(0.006) 0.040*** (0.003) 0.031***
(0.188) 1.024*** (0.126) 0.685***
(0.009)
0.071***
0.031***
0.702***
0.015*
First stage
(4)
(0.063)
(0.066)
(0.076)
(0.072)
(0.071)
(0.071)
(0.075)
(0.089)
(0.052)
(0.052)
(0.054)
(0.053)
(0.048)
(0.048)
(0.052)
(0.060)
0.013
0.080
0.076
0.147**
0.102
0.070
0.127*
0.101
(0.059)
(0.060)
(0.074)
(0.065)
(0.067)
(0.066)
(0.069)
(0.084)
0.182*** (0.045)
0.234*** (0.045)
0.226*** (0.046)
0.202*** (0.046)
0.128*** (0.046)
0.043 (0.047)
0.016 (0.049)
0.118** (0.053)
(0.011) 0.053*** (0.008)
(0.023) 0.057*** (0.022)
(0.007) 0.041*** (0.003)
(0.192) 1.060*** (0.126)
(0.138)
FE IV second stage
(0.138)
(0.009)
First stage
FE IV second stage
(3)
0.594***
0.016*
(2)
(1)
0.112*
0.168**
0.155**
0.188***
0.198***
0.156**
0.224***
0.158*
0.067
0.177***
0.182***
0.159***
0.121**
0.102**
0.043
0.045
0.592***
0.015*
0.051***
0.069***
0.030***
0.662***
First stage
(6)
(0.062)
(0.065)
(0.075)
(0.071)
(0.070)
(0.070)
(0.074)
(0.089)
(0.052)
(0.052)
(0.054)
(0.052)
(0.048)
(0.048)
(0.052)
(0.059)
0.016
0.077
0.074
0.144**
0.100
0.070
0.127*
0.102
(0.059)
(0.060)
(0.074)
(0.066)
(0.067)
(0.066)
(0.069)
(0.084)
0.181*** (0.045)
0.233*** (0.045)
0.224*** (0.046)
0.201*** (0.046)
0.127*** (0.046)
0.041 (0.047)
0.013 (0.049)
0.121** (0.053)
(0.138)
(0.009)
0.015* (0.009)
(0.011) 0.053*** (0.008)
(0.023) 0.057*** (0.022)
(0.007) 0.041*** (0.003)
(0.192) 1.062*** (0.126)
FE IV second stage
(5)
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z-Trust
Individualism
Bonus
Male
Tenure
Tenure2/1000
Age
21 - 24
25 - 29
30 - 34
35 - 39
40 - 44
45 - 49
50 - 54
55þ
Education
Year 10
High school
Basic vocational
Skilled vocational
Assoc. diploma
Undergraduate
Postgraduate
Other
Variable
Table 7. Individualism, Bonus, and Decentralization: Establishment FE IV Estimates (Establishment-Clustered SEs in Parentheses)
524 The Journal of Law, Economics, & Organization, V36, N3
16,797
1770
22.673**
19.93
0.663
0.026
0.176***
0.288***
0.257***
0.430***
0.586***
1.028***
0.447***
(10%)
(0.043)
(0.041)
(0.040)
(0.045)
(0.041)
(0.046)
(0.068)
(0.097)
(0.044)
(0.040)
(0.038)
(0.049)
(0.044)
(0.047)
(0.045)
(0.100)
2.215*** (0.361)
0.904*** (0.283)
16,797
1770
0.075*
0.089**
0.139***
0.113**
0.012
0.104**
0.397***
0.096
16,797
1770
24.003**
19.93
0.836
0.028
0.165***
0.288***
0.262***
0.426***
0.579***
0.995***
0.438***
(10%)
(0.043)
(0.041)
(0.041)
(0.045)
(0.041)
(0.046)
(0.065)
(0.098)
(0.044)
(0.040)
(0.038)
(0.049)
(0.044)
(0.047)
(0.046)
(0.100)
2.295*** (0.358)
0.866*** (0.282)
16,797
1770
0.075*
0.081**
0.141***
0.110**
0.015
0.100**
0.372***
0.089
16,797
1770
22.751**
19.93
0.779
0.026
0.168***
0.291***
0.260***
0.427***
0.582***
1.004***
0.439***
(10%)
(0.043)
(0.041)
(0.041)
(0.045)
(0.041)
(0.045)
(0.066)
(0.097)
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***Significant at 1% level, **significant at 5% level, *significant at 10% level.
Occupation
Machine operators
Sales and personal service
Clerks
Tradespersons
Para-professionals
Professionals
Managers
Other
Instruments
Inherited Trust
Promises Broken (UK)
Observations
No. establishments
Kleibergen–Paap F-statistic
Critical value (max IV size)
Hansen-J p-value
(0.044)
(0.040)
(0.038)
(0.049)
(0.044)
(0.047)
(0.046)
(0.100)
2.240*** (0.360)
0.865*** (0.282)
16,797
1770
0.076*
0.081**
0.142***
0.110**
0.014
0.101**
0.373***
0.088
Worker Trust in Management and Delegation in Organizations
525
526 The Journal of Law, Economics, & Organization, V36, N3
Funding
Andrew Wait thankfully acknowledges funding from the Sydney Social
Sciences and Humanities Advanced Research Centre Fellowship 2018.
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5. Concluding Comments
If a manager is willing to delegate authority to a subordinate when contracts are incomplete, she must, in some sense, trust them to do the right
thing. An employee will also, no doubt, have an opinion about the trustworthiness of management. This is relevant to the design of an organization because if an employee trusts her superiors, management can make
promises with some credibility, even in the absence of legal enforcement.
Theories like relational-contracting models formalize this idea; within a
repeated game framework, trust of management by employees enables
delegation. If feasible, such relationships/implicit contracts can enhance
firm value by enhancing the effective use of employees’ knowledge and
skills.
Our empirical analysis shows a highly significant and positive relationship between delegation and an individual employee’s trust of management. This is true for both our OLS and FE estimates. The results also
suggest an endogeneity between trust and delegation. Nonetheless, the
trust–delegation relationship remains—indeed, becomes stronger—when
we instrument for trust in our IV estimates. Third, consistent with economic models of organizations, a number of other factors are also significantly related to delegation, including employee occupation, gender, and
human capital. Furthermore, our results are suggestive of trust within
firms as being better understood as an individual-level relationship between an employee and management, rather than as a group-level organizational culture.
Finally, while our results confirm a significant relationship between
trust and delegation, we do not explain here which actions are most important in the evolution (or maintenance) of trust. A key practical question for managers and researchers is “what produces a high-trust
equilibrium in firms?” Indeed, understanding the answer to this question could help explain persistent performance differences between
seemingly similar firms (Gibbons and Henderson 2013). What is apparent from our study is that individual-level factors like worker characteristics and relationships are at least as important as organizational-level
systems.
Worker Trust in Management and Delegation in Organizations
527
Appendix
Table A1. Correlations between Education, z-Trust, and Decentralization (N ¼ 16,797)
N
z-Trust
Decentralization
Primary
Year 10
High school
Basic vocational
Skilled vocational
Assoc. diploma
Undergraduate
Postgraduate
Other
378
4559
3130
719
1998
1598
2362
1708
345
0.008
0.026
0.003
0.001
0.044
0.010
0.012
0.005
0.000
0.061
0.111
0.029
0.017
0.044
0.037
0.103
0.136
0.006
Source: AWIRS95.
Table A2. Correlations between Occupation, z-Trust, and Decentralization (N ¼ 16,797)
Variable
N
z-Trust
Decentralization
Laborers
Machine operators
Sales and personal service
Clerks
Tradespersons
Para-professionals
Professionals
Managers
Other
2245
1508
2042
3114
1441
2090
2831
1390
136
0.003
0.025
0.006
0.027
0.046
0.034
0.004
0.076
0.005
0.162
0.112
0.085
0.001
0.059
0.011
0.137
0.301
0.007
Source: AWIRS95.
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Variable
528 The Journal of Law, Economics, & Organization, V36, N3
Table A3. Mean of Trust (binary)a and Discriminationb by Country of Origin
N
Trust (binary)
Discrimination
Mean
Australia
Afghanistan
Argentina
Cambodia
Canada
Chile
Egypt
El Salvador
Germany
Greece
Hong Kong
Hungary
India
Indonesia
Iran
Iraq
Italy
Japan
Korea
Lebanon
Malaysia
New Zealand
China
Peru
Philippines
Poland
Romania
Russia
Singapore
Somalia
South Africa
Sri Lanka
Syria
Taiwan
Thailand
Turkey
UK and Ireland
USA
Ukraine
Vietnam
Yugoslavia
Other
Total
N
Correlationc
12,914
43
6
9
33
19
25
8
120
82
51
19
104
12
4
5
130
8
7
44
85
325
46
5
130
48
7
7
28
1
65
54
3
1
6
18
1388
64
3
79
54
737
16,797
16,767
0.656
0.651
0.500
0.778
0.606
0.842
0.800
0.875
0.692
0.744
0.627
0.421
0.750
0.750
1.000
0.800
0.785
0.750
0.857
0.682
0.694
0.702
0.804
0.400
0.785
0.729
0.857
0.714
0.786
1.000
0.692
0.704
0.667
0.000
0.833
0.778
0.642
0.641
1.000
0.785
0.722
0.687
0.663
16,797
0.0372
0.000
0.284
0.462
0.454
0.261
0.463
0.696
0.464
0.055
0.353
0.329
0.305
0.318
0.460
0.682
0.846
0.364
0.297
0.340
0.714
0.431
0.000
0.333
0.467
0.423
0.303
0.326
0.299
0.420
0.290
0.196
0.316
0.565
0.264
0.442
0.852
0.064
0.237
0.309
0.468
0.373
0.290
0.034
16,061
a
Average of employee Trust(binary).
Decrease in probability of getting a job, which equals or betters preimmigration occupation or qualifications conditional on visa status and human capital. Australian and New Zealanders normalized to 0.
c
Correlations are calculated at the individual level.
Source: Junankar and Mahuteau (2005).
b
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Country of birth
(0.204)
(0.021)
(0.007)
(0.219)
(0.052)
(0.052)
(0.053)
(0.051)
(0.046)
(0.048)
(0.051)
(0.063)
(0.064)
(0.069)
(0.079)
(0.074)
(0.074)
(0.073)
(0.077)
0.060***
0.027***
0.653***
0.146***
0.268***
0.277***
0.246***
0.196***
0.151***
0.094*
0.061
0.105
0.201***
0.175**
0.197***
0.280***
0.210***
0.270***
(0.051)
(0.051)
(0.064)
(0.057)
(0.057)
(0.056)
(0.059)
(0.036)
(0.034)
(0.035)
(0.035)
(0.035)
(0.036)
(0.038)
(0.041)
0.122***
0.165***
0.152***
0.133***
0.074**
0.001
0.015
0.121***
0.028
0.065
0.061
0.095*
0.085
0.060
0.110*
(0.016)
(0.003)
(0.109)
0.015
0.031***
0.855***
First stage OLS
ML-SYS (second)
0.855***
(2)
(1)
0.111*
0.206***
0.197***
0.238***
0.283***
0.233***
0.302***
0.215***
0.360***
0.394***
0.347***
0.303***
0.257***
0.203***
0.127**
1.782***
0.118***
0.038***
0.830***
(0.063)
(0.065)
(0.075)
(0.068)
(0.069)
(0.070)
(0.074)
(0.046)
(0.044)
(0.046)
(0.045)
(0.045)
(0.046)
(0.049)
(0.055)
(0.087)
(0.021)
(0.004)
(0.131)
ML-SYS (second)
(3)
(4)
(0.059)
(0.058)
(0.059)
(0.059)
(0.059)
(0.061)
(0.063)
(0.069)
(0.073)
(0.074)
(0.088)
(0.080)
(0.081)
(0.081)
(0.084)
0.333***
0.426***
0.437***
0.399***
0.312***
0.221***
0.198***
0.006
0.031
0.098
0.139
0.196**
0.143*
0.140*
0.221***
Continued
(0.025)
(0.004)
(0.154)
0.119***
0.059***
1.470***
First stage probit
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z-Trust
Trust(binary)a
Male
Tenure
Tenure2/1000
Age
21–24
25–29
30–34
35–39
40–44
45–49
50–54
55þ
Education
Year 10
High school
Basic vocational
Skilled vocational
Assoc. diploma
Undergraduate
Postgraduate
Variable
Table A4. Maximum Likelihood System IV Estimates for Decentralization with Endogenous z-Trust and Trust(binary) (Establishment-Clustered SEs in
Parentheses)
Worker Trust in Management and Delegation in Organizations
529
(0.044)
(0.037)
(0.039)
(0.045)
(0.041)
(0.045)
(0.074)
(0.108)
0.058
0.183***
0.330***
0.247***
0.331***
0.599***
1.071***
0.403***
16,797
(0.094)
(0.074)
(0.034)
(0.028)
(0.027)
(0.037)
(0.031)
(0.035)
(0.037)
(0.085)
(0.293)
(0.178)
0.071
0.027
0.021
0.096***
0.048
0.005
0.071**
0.316***
0.066
1.728***
0.410**
16,797
First stage OLS
ML-SYS (second)
0.186**
(2)
(1)
16,797
0.118***
0.104***
0.399***
0.296***
0.430***
0.606***
1.047***
0.399***
0.189**
(0.041)
(0.038)
(0.036)
(0.042)
(0.041)
(0.044)
(0.042)
(0.106)
(0.091)
ML-SYS (second)
(3)
(4)
(0.103)
(0.050)
(0.046)
(0.043)
(0.055)
(0.050)
(0.053)
(0.057)
(0.117)
(0.362)
(0.252)
0.110
0.136***
0.126***
0.028
0.149***
0.156***
0.044
0.369***
0.063
2.307***
0.832***
16,797
First stage probit
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a
Standardized coefficient for Trust(binary) variable.
***Significant at 1% level, ** significant at 5% level, * significant at 10% level.
Notes: Establishment-level clustered SEs for 1770 establishments estimated in parentheses. Maximum likelihood system assumes joint normal distribution for the errors of the two equations.
Other
Occupation
Machine operators
Sales and personal service
Clerks
Tradespersons
Para-professionals
Professionals
Managers
Other
Instruments
Inherited Trust
Promises Broken (UK)
Observations
Variable
Table A4. Continued
530 The Journal of Law, Economics, & Organization, V36, N3
Worker Trust in Management and Delegation in Organizations
531
Table A5. Fixed Effect IV Estimates for Decentralization with Endogenous z-Trust and
Country of Birth Controls (Establishment-Clustered SEs in Parentheses)
Variable
a
(2)
IV second stage
First stage
0.706**
0.078***
0.036***
0.824**
(0.312)
(0.029)
(0.013)
(0.343)
0.056**
0.040***
1.022***
(0.022)
(0.003)
(0.126)
0.090
0.207**
0.208**
0.184**
0.136**
0.107**
0.047
0.033
(0.073)
(0.088)
(0.086)
(0.081)
(0.065)
(0.054)
(0.056)
(0.068)
0.180***
0.241***
0.232***
0.211***
0.140***
0.053
0.024
0.106**
(0.045)
(0.045)
(0.046)
(0.046)
(0.047)
(0.048)
(0.050)
(0.054)
0.093
0.157**
0.140*
0.190**
0.187**
0.135*
0.204**
0.142
(0.066)
(0.070)
(0.080)
(0.080)
(0.076)
(0.074)
(0.084)
(0.097)
0.035
0.068
0.064
0.124*
0.092
0.062
0.123*
0.097
(0.059)
(0.060)
(0.074)
(0.066)
(0.067)
(0.066)
(0.070)
(0.084)
0.031
0.156***
0.265***
0.264***
0.427***
0.574***
0.978***
0.432***
(0.051)
(0.054)
(0.060)
(0.056)
(0.043)
(0.064)
(0.145)
(0.105)
0.074*
0.095**
0.145***
0.108**
0.000
0.119**
0.409***
0.096
(0.044)
(0.040)
(0.038)
(0.049)
(0.044)
(0.047)
(0.045)
(0.100)
0.876***
Yes
16,797
1770
(0.283)
Yes
16,797
1770
9.547**
8.96
(15%)
Weak instruments test: Kleibergen–Paap rk Wald F-statistic, H0 ¼ weak instruments. Critical values from Stock and
Yogo (2005, Table 2).
***Significant at 1% level, **significant at 5% level, *significant at 10% level.
Note: Establishment-clustered SEs for 1770 establishments estimated in parentheses.
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z-Trust
Male
Tenure
Tenure2/1000
Age
21–24
25–29
30–34
35–39
40–44
45–49
50–54
55þ
Education
Year 10
High school
Basic vocational
Skilled vocational
Assoc. diploma
Undergraduate
Postgraduate
Other
Occupation
Machine operators
Sales and personal service
Clerks
Tradespersons
Para-professionals
Professionals
Managers
Other
Instruments
Promises Broken (UK)
Country of birth
Observations
No. establishments
Kleibergen–Paap F-statisticsa
Critical value (max IV size)
(1)
532 The Journal of Law, Economics, & Organization, V36, N3
Table A6. Fixed Effect IV Estimates for Decentralization with Endogenous z-Trust and FE
at the Occupational Group within an Establishment (Establishment-Clustered SEs in
Parentheses)
Variable
(2)
FE-IV second stage
First stage
0.464**
0.044*
0.030***
0.726***
(0.184)
(0.025)
(0.009)
(0.250)
0.045*
0.041***
1.109***
(0.026)
(0.004)
(0.149)
0.027
0.125*
0.100
0.065
0.072
0.053
0.026
0.021
(0.056)
(0.065)
(0.066)
(0.059)
(0.056)
(0.054)
(0.059)
(0.073)
0.123**
0.243***
0.222***
0.169***
0.128**
0.020
0.010
0.148**
(0.050)
(0.051)
(0.052)
(0.052)
(0.053)
(0.054)
(0.056)
(0.063)
0.092
0.146*
0.146
0.163*
0.141*
0.149*
0.223**
0.148
(0.074)
(0.080)
(0.091)
(0.084)
(0.083)
(0.085)
(0.089)
(0.101)
0.041
0.072
0.091
0.123
0.067
0.075
0.115
0.100
(0.073)
(0.076)
(0.091)
(0.081)
(0.083)
(0.084)
(0.086)
(0.105)
2.219***
14,119
3646
(0.429)
14,119
3646
26.740**
16.38
(10%)
a
Weak instruments test: Kleibergen–Paap rk Wald F-statistic, H0 ¼ weak instruments. Critical values from Stock and
Yogo (2005, Table 2).
Note: Establishment-level clustered SEs for 1770 establishments estimated in parentheses.
***Significant at 1% level, ** significant at 5% level, * significant at 10% level.
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z-Trust
Male
Tenure
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Age
21–24
25–29
30–34
35–39
40 - 44
45 - 49
50 - 54
55þ
Education
Year 10
High school
Basic vocational
Skilled vocational
Assoc. diploma
Undergraduate
Postgraduate
Other
Instruments
Inherited Trust
Observations
No. occupation/establishments
Kleibergen–Paap F-statistica
Critical value (max IV size)
(1)
Worker Trust in Management and Delegation in Organizations
533
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