A Theory of Authority

Akerlof (2008) (“A Theory of Social Motivation”) gives a theory of how beliefs regarding how one should or should not behave—“ideals”—form in a population. This paper builds on that framework to develop a theory of leadership and authority. Followers of a leader are viewed as holding a particular type of ideal: they believe that they should do what a leader tells them to do. According to the theory, individuals choose their ideals: so it is a choice to be a follower. This paper models the circumstances in which individuals will choose to follow a leader. These insights are then applied to the principal-agent problem. The paper considers the possibility that a principal might have authority over—be seen as a leader by—an agent. Authority is a valuable tool for incentivizing agents. The notion of an authority maintenance (AM) constraint is developed; this constraint must be satisfied for the principal to maintain authority over the agents. The AM constraint explains many important economic phenomena: (1) fixed wages in a moral hazard setting; (2) above-market—i.e., efficiency—wages; (3) failure to hire overqualified workers; (4) the nature of organizational bureaucracy; and (5) attempts by bosses/leaders to live up to the values of their workers/followers. The AM constraint also has implications for the theory of firm scope.

A Theory of Social Motivation

This paper develops a theory of social norms: what they are, how they form, and how they change. The theory also makes predictions about group formation, categorization, and discrimination, and it can be extended to model leadership and fairness. The paper accounts for the existence of “oppositional culture,” where minority groups disparage the majority and are disparaged in turn. An explanation is suggested for the rise of an African-American oppositional culture of this sort in the late 1960s and early 1970s. Other implications of the model are also elaborated. According to the theory, social norms can form because they support cooperation between individuals. An aspect of how people categorize themselves and others—called "comparative fit"—is explained by the theory.

The Nature of Tournaments

Co-authored with Richard Holden

This paper characterizes the optimal way for a principal to structure a rank-order tournament in a moral hazard setting (as in Lazear and Rosen (1981)). With considerable generality, it is optimal to give rewards to top performers that are smaller in magnitude than corresponding punishments to poor performers. The paper also identifies four reasons why the principal might prefer, instead, to give larger rewards than punishments: (i) risk aversion (R) is small relative to absolute prudence (P); (ii) the distribution of shocks to output is asymmetric and the asymmetry takes a particular form; (iii) the principal faces a limited liability constraint; and (iv) there is agent heterogeneity of a particular form. Intuition is given as to why these factors affect the optimal prize schedule. This paper uses the theory developed by Green and Stokey (1983) to relate the results about tournaments to the structure of the optimal individual contract. The optimal individual contract typically punishes low output more than it rewards high output. The paper also gives conditions under which the optimal individual contract will be a concave function of output.