Hierarchy, Commitments,

Leadership and Property rights

 Questions
• Why do you need hierarchy in production
process (firm)?
• Why do we need someone to supervise our
job?
• Why not we decide on individual
contributions and get paid accordingly?
• Why not make binding decision about
distribution of jointly generated revenue and
mandated levels of individual efforts?
 Social Decision Process
• Social decision process is a function that takes
all possible combination of individual
preferences as inputs and provides a social
preference ordering as output

Person 1 A>B
Person 2 B>A
Person 3 B>A
Social Decision B>A
(Majority Rule)
 Case of an Organisation
• One Manager
• Two Producer
• Two Salesman
Producer (2) Salesman (2) Manager (1)
Proposal A: Producer thinks his effort 20,000 each 15,000 each 30,000
higher than Salesman
Proposal B: Salesman thinks his effort 10,000 each 22,500 each 35,000
higher than Producer
Proposal C: Manager thinks he should 15,000 each 12,500 each 45,000
get paid more

Salesman and Manager B>A

C> B> A C> A
Producer and Manager C>B
Producer and Salesman A>C
For any alternative that players might settle on, there would be a majority coalition
that always preferred something else
• Larger the number of voters, the larger the
number of alternatives and more dimensions
along which voters evaluate alternatives
– Higher problem in social decision process
• Manger who permits other employees to
reflect their choices in decision making equally
creates organizational instability,
indecisiveness, inefficiency or manipulation
• We need to create centralised power and
hierarchy
• Owners maintain authority over personnel,
marketing, operations and capital decision
making
– Stop shirking by monitoring and incentivizing
 Vertical Dilemma
• Contract between supervisors and subordinates
– Self-interested behaviour of subordinate and superiors
lead to mutually unsatisfactory outcome
– Ruin the efficiency of managerial strategy
• Manager's role as specialized monitoring and
motivation of members of a team
• Supervisor-subordinate relationship is based on an
asymmetry that makes it difficult to operationalise
norms of reciprocate cooperation
– Differences in pay
– Differences in job securiy
• Lack of trust between supervisor-subordinate
 Leadership in Vertical Dilemma
• Solution : Cooperation between supervisor-
subordinate
• Cooperation is possible but not inevitable
• Leader to shape expectations among
subordinates about cooperation among
employees, and between employees and their
hierarchical superiors
– Communication
– Symbolic position taking
• Leader has a central role of commitment for long-
run incentives
 How to shape expectation?
Reciprocation
• “I will cooperate if you will”
• Commitment Problem
– Employee suspicion is rational
– Obstacle for work-participation, productivity etc.
• Requires credible commitment
– Only incentives would not work
 Key to Cooperation

Reciprocation Reputation Trust

Communication

Credible
Commitment
 Reputation

• Asset for an company

• Based on past actions / reciprocations
• Building reputation
– Communication for building trustworthy
reputation
– Employees find trustworthy to share private
information and costly effort
– Primary function of a leader is to earn trust of his
or her employees
• Consider manager as co-worker
 Communication
• Communications not sufficient to solve dilemmas
but necessary part of the culture building that
solves social dilemma
• Face to face communication
– Learning from employees
– Not performance of employees but performance of
organization
– Imparts team spirit
• Communicating symbolically
– Signals that communicate some aspect of an
organization clearly and with emotional impact
– Sharing common cafeteria or parking lot symbolizes
managers regard employees as equal partners in firm
 Signaling Commitments: Constitutional
Constraints

• Constitutional solution: permanent restriction

on the ability of managers to peruse self-
interested behavior at the expense of long-
term cooperation
• Appearing to be committed to a set of rules
that leader would live up to and enforce
• Face-to-face communication may not be
possible in large organisation
 Signaling Commitments
• Employee representation
– Sharing of centralised decision-making power with
employee representatives
• Expanded property rights
– Employee stock ownership plans
– create sense of “ownership”

• Commitment and training

– Investment in human capital
– Expenditure of resource on training and education for
employees is not rational if management regards employees
as expendable - “we value our employees”
• Constraints on Supervision
– Time clock
– Autonomy on time and space
 Signaling Commitment in Cooperative
• Patronage System
– Centrality potential: co-operative to become
central to its business, its members and its
domain because it provides services that
members value

• Seeking Salience: Centrality and Prominence

– lives of their members
– business in which they compete
– economy of their domain
 What Co-operatives can do?
Woman dairy co-operative in Rajasthan
• Training the members
– Advice received from dairy officials mostly related to motivating
member to be regular milk pourers but not much on technical
issues
• Capacity building in feeding and health-management of dairy
animals
• Need for improved varieties and supply of quality seeds for
dual purpose: food and flooder
• Guidance for entrepreneurship development from extra
income out of dairying
• Communication network for seeking information
• Tacit knowledge management through experience sharing in
animal care and management activity
• Explicit knowledge through dairy officials, researchers and
other professionals