An Economic Theory of Leadership

This dissertation develops an economic theory of leadership based on assignment of information.Common theories assume that organizations exist to reduce transaction costs by replacingimperfect markets with incomplete long term contracts that give managers the power to commandsubordinates. This view reverses all of these premises: I study an organization in whichit is costless to transmit and process information, contracts exist in the backgound if at all,and agents are not bound to the organization. The organization is held together by economiesof scale in generating information and by the advantages of controlling access to that information.The minimalist model of organizations produces a minimalist theory of leadership:leaders have no special talent but are leaders simply because they are given exclusive access tocertain information. A single leader induces a first best outcome if his incentives are alignedwith his subordinates. If a single leader is not credible, then diluting the power of leadershipby appointing multiple informed leaders can ensure credibility and improve e.ciency but cannot produce the first best. If agents are di.erentiated by their costs of cooperation the mostcooperative player is not necessarily the best leader. In this scenario, the ability of the groupto sustain fully cooperative outcomes may depend on the player with the least propensity tocooperate. Therefore, to maximize e.ciency (i.e., to maximize the range of circumstances inwhich e.cient cooperation is sustainable), the group should sometimes promote less cooperativepeople. Here, âless cooperativeâ means lazy or busy rather than disagreeable. This dissertationalso applies the idea of leadership (endorsement) to voluntary provision of public goods.I show that when the leader is unable to fully reveal his information expected contributions,ex-ante, are unambigeously higher in the leader-follower setting. That is partial revelation ofinformation induces more contribution compared to full revelation or complete information. Ialso show that if the utility functions are linear then ex-ante welfare is unambigeously higherin the presence of an informed endorser.