Uncertainty Drives Them Apart - Managerial Practices in Teams

Abstract : Managerial practices vary not just across different organizational forms but also within. I present a model where some firms optimally choose the same organizational form, yet different managerial practices. Firms choose their organizational and managerial practices in response to a given task distribution. These distributions contain some relatively simple and some complex tasks. Some firms face distributions with low variance and low uncertainty about the tasks at hand, while other firms face distributions with high task uncertainty. I show that 'team' is the optimal organizational form for firms facing complex tasks, even if there is no uncertainty, and for firms facing high task uncertainty, even for relatively simple tasks. But optimal managerial practices depend on the distribution of tasks, the variance in pay-offs, and the likelihood that a particular worker's effort is needed for the firm to succeed - and therefore complexity and uncertainty-driven teams choose different managerial practices. The results shed light on anecdotal variability of team management practices and suggest that empirical studies of team production take the underlying task distribution into account.

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Managing Information and Incentives for Choice and Execution in Relational Contracts

Abstract : We consider a relational contracting model in which the project is selected by the party with authority before the agent exerts effort to execute the project. In order to induce the agent to exert effort, the principal controls the agent's confidence, defined as the belief on the project to be promising, through allocation of authority as well as pays discretionary bonuses. In contrast to the case where the agent has authority, allocating authority to the principal makes the agent's confidence uncertain that hinders effort for patient parties, but fosters effort for impatient parties. Consequently, authority is not necessarily allocated to the party with superior information.

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Incentives and Rank Effects in Managerial Tournaments

Abstract : When firms use relative performance pay in which they rank employees, an employee’s behaviour may respond to the rank they get. What is the relative importance of rank effects compared to monetary incentives? What is the direction of rank effects? Arguably, a bad rank may generate desire to catch up, or it may discourage further effort. In this paper we address these questions by analysing store managers in a large firm where the bonus is determined through a high powered tournament. We study managers’ response to feedback about their rank. In this tournament, the bonus is a step function of rank, and so marginal incentives and rank have a non-monotonic relationship, allowing us to separate the impact of incentives from that of rank on behaviour of managers. First, we find that managers ignore marginal incentives, but respond to rank. Second, their response suggests desire to catch up: when managers get a bad rank on either profit or service, they respond by improving performance. This response is monotonic in rank. Importantly, we show that managers achieve these improvements by making corresponding changes to labour and production, the key input variables directly under their control.

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