The advantage of hierarchy: Inducing responsibility and selecting ability?

• Published in: Journal of behavioral and experimental economics 2016-12, Vol.65, p.49-57
• Main Authors: Otto, Philipp E., Bolle, Friedel
• Format: Article
• Language: English
• Subjects: Corporate culture; Decision analysis; Decisions; Discretion; Equity; Hierarchical delegation; Hierarchies; Principal-agent models; Productivity; Public good; Public good experiments; Social privilege; Studies; Team production
• ISSN: 2214-8043; 2214-8051
• DOI: 10.1016/j.socec.2016.08.008

•We investigate the consequences of implementing hierarchy in team work.•Introducing an allocator increases production considerably.•Introducing a principal further increases production as well as positive ratings.•Inequity aversion can explain the observed advantages of tiered structures. We theoretically and experimentally investigate team production with and without a leading member of the team (called allocator) who has discretion over the input of all team members including herself. In a further extension of the allocator game, a superior (called principal) is introduced who is interested in high production and who can exchange the allocator. Team production and remuneration are modeled as a linear public good game with a finite number of periods. The main results are that (a) the appointment of a random allocator improves production so that average incomes of all workers, including the allocator, are higher when compared with voluntary contributions, (b) the introduction of a principal further improves production as well as satisfaction and fairness ratings. (a) and (b) describe the advantage of a tiered hierarchy. We provide a formal model of hierarchical decisions as well as derive and test various behavioral hypotheses.