Leadership Style and Incentives

Julio Rotemberg and Garth Saloner
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Garth Saloner: Graduate School of Business, Stanford University, Stanford, California 94305

Management Science, 1993, vol. 39, issue 11, 1299-1318

Abstract: We study the relationship between a firm's environment and its optimal leadership style. We use a model in which contracts between the firm and managers are incomplete so that providing incentives to subordinates is not straightforward. Leadership style, whether based on organizational culture or on the personality of the leader, then affects the incentive contracts that can be offered to subordinates. We show that leaders who empathize with their employees adopt a participatory style and that shareholders gain from appointing such leaders when the firm has the potential for exploiting numerous innovative ideas. By contrast, when the environment is poor in new ideas, shareholders benefit from hiring a more selfish (i.e., more profit maximizing) leader whose style is more autocratic.

Keywords: leadership style; employee participation; incomplete contracts; incentives for innovation (search for similar items in EconPapers)
Date: 1993
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