Authority, overconfidence, and motivation

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This paper addresses the questions of who in a firm's hierarchy makes investment decisions and how the need to motivate subordinates influences the delegation of authority. I present a simple model of a manager and a subordinate who interact before, during, and after project
selection. Before project selection, the subordinate can make a search effort in order to better evaluate the correctness of the project, and recommends the manager which project to select. During project selection, the manager can either overrule or rubberstamp the subordinate's
recommendation. After project selection, the subordinate decides on the intensity of his implementation effort. Performance depends both on the correctness of the selected project and on the intensity of the implementation effort. I show that managers tend to over-delegate decision-making to subordinates when projects need a high implementation effort. I also show that the subordinate's equilibrium search effort is not monotonic in his search skills nor in
the manager's willingness to delegate decision-making. Some subordinates with moderate-to-high skills prefer to stay ignorant and not to participate in decision-making even if managers are prone to delegate. Finally, I show that managerial overconfidence mitigates the manager's tendency to over-delegate.

Author(s):

Laurent Vilanova    
Université Lyon 2 - Coactis
France