Organizations with Power-Hungry Agents

We analyze a model of hierarchies in organizations in which neither decisions nor the delegation of decisions is contractible and in which power-hungry agents derive a private benefit from making decisions. Two distinct agency problems arise and interact: subordinates make more biased decisions (which favors adding more hierarchical layers), but uninformed superiors may fail to delegate (which favors removing layers). A designer may remove intermediate layers of the hierarchy (eliminate middle managers) or flatten an organization by removing top layers (eliminate top managers). We show that stronger preferences for power result in smaller, less-integrated hierarchies.

Our key insight is that hoarding of decision rights is especially severe at the top of the hierarchy.