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Optimal Loyalty‐Based Management

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  • Dongsoo Shin

Abstract

We study an agency model in which an entrepreneur selects a manager from a candidate set. The selected manager's effort improves the project's potential environment, and is a hidden action. The realized project environment is the entrepreneur's private information. A manager's utility has two components—(i) loyalty, with which the manager values the organization's profit, and (ii) selfishness, with which the manager values the monetary transfer he receives from the entrepreneur. We find that if the manager's task is easy enough, it is optimal to use a purely loyal manager. Otherwise, it can be optimal to use a manager with mixture of loyalty and selfishness—the manager's mixed motivation alleviates the entrepreneur's misrepresenting incentive, and as a result, the output distortion in the optimal contract can be reduced. In addition, when it is optimal to use a manager with mixed motivations, the entrepreneur selects someone who is more selfish than loyal.

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  • Dongsoo Shin, 2017. "Optimal Loyalty‐Based Management," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(2), pages 429-453, June.
    • Handle: RePEc:bla:jemstr:v:26:y:2017:i:2:p:429-453
    DOI: 10.1111/jems.12194
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    Cited by:

    1. Gorkem Celik & Dongsoo Shin & Roland Strausz, 2021. "Public good overprovision by a manipulative provider," RAND Journal of Economics, RAND Corporation, vol. 52(2), pages 314-333, June.

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