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Leadership and Peer Effects in an Organization.

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Title: Leadership and Peer Effects in an Organization.


1
Leadership and Peer Effects in an Organization.
  • Penélope Hernández
  • Gonzalo Olcina
  • Raúl Toral

2
LEADERSHIP AND PEER EFFECTS IN AN ORGANIZATION
  • Agents might have an incentive to conform to the
    views of others (specially, of leaders).
  • Economic theory focusses on monetary or material
    incentives for agents with given preferences.
  • But we know from psychology and sociology that
    preferences might change. And we also know which
    are the sources for change.
  • Therefore, perhaps is cheaper for the Principal
    to make the agents behave as the Principal wants
    by socializing them to the rightpreferences,
    instead of providing them the rigth monetary
    incentives.

3
LEADERSHIP AND PEER EFFECTS IN AN ORGANIZATION
  • Agency theory many times you cannot use money to
    align incentives.
  • In these cases, aligning preferences might be a
    useful alternative. (See for instance, the army,
    a religious organization, a revolutionary
    party).
  • The Principal can make the agents conform to his
    views through indoctrination or socialization,
    provided he is perceived as a leader by the
    agents.
  • However, this source of preference change (or
    preference formation) competes with other sources
    also very well-documented in the psychological
    and sociological literature. For instance, the
    inertia of your idiosyncratic preferences.
  • And, specially relevant in an organization, are
    endogenous social norms, that is, social norms of
    behavior established by your peers.

4
LEADERSHIP AND PEER EFFECTS IN AN ORGANIZATION
  • PRINCIPAL
  • He has an ideal accion for each agent-
  • N-AGENTS Every agent chooses an action xit, and
    has an ideal action sit a preference .

5
LEADERSHIP AND PEER EFFECTS IN AN
ORGANIZATIONPrincipal
  • P has some ideal organization composition or
    vector of preferred actions si one for each agent
    i that we assume time independent and also
    exogenous.
  • P can invest in costly socialization trying to
    instill this "corporate culture" in all the
    agents of the organization.

All the ideal actions are different
All the ideal actions coincide
6
LEADERSHIP AND PEER EFFECTS IN AN ORGANIZATION
Agents
  • Each agent i has her ideal action sit at stage t
    and chooses an action xit. When an agent makes a
    decision on xit her behavior is driven by two
    competing motives
  • She wants her behavior to agree
  • with her personal ideal action sit


  • 2) She wants also her behavior to

  • be as close as possible to the

  • average behavior of her peers.

7
The N-player game
  • Research in sociology and psychology indicate
    that individuals want to minimize the social
    distance between themselves and the social norms
    established by their peers.
  • And also that there are costs (that might be
    psychological or material) associated with the
    distance between your actual behavior and your
    ideal behavior (see specially, the notion of
    "identity" of Akerlof and Kranton, 2000).
  • The parameter ?i describes the taste for
    conformity and measures the intensity of the
    social (endogenous) norm.
  • This is the standard way to model conformity and
    social norms in economics (see, among others,
    Akerlof, 1980, Bernheim, 1994, Gillen, 1994,
    Kandel and Lazear, 1992, Akerlof, 1997, Kandori,
    2000, Huck, Kübler and Weibull, 2006, Fischer and
    Huddart, 2008...).

8
LEADERSHIP AND PEER EFFECTS IN AN ORGANIZATION
  • Ideal actions or preferences of the agents evolve
    over time.
  • There are two sources of preference change.
  • On the one hand, there exists a costly corporate
    socialization effort exerted by P trying to
    transform the ideal action of each agent sit to
    the ideal action for P,
  • On the other hand, each agent's ideal action
    changes in the direction of actual behavior
    (self-persuasion or cognitive dissonance).
  • These are in essence two psychological sources
  • Follow the leader
  • Self-consistence
  • FORMALLY

9
LEADERSHIP AND PEER EFFECTS IN AN ORGANIZATION
The preferred action of agent i evolves subject
to two forces
  • The socialization effort of the corporation dit,
    trying to instill in the agent i the "ideal
  • The way to model purposeful socialization effort
    of a "cultural parent" is similar to others in
    the literature (see, for example, Bisin and
    Verdier, 2001 or for the case of a continuos
    trait or preference, Panebianco, 2009, Pichler,
    2009).
  • When this socialization effort does not succeed,
    the preference of agent i changes in the
    direction of his actual (Nash equilibrium)
    behavior with an intensity ?.
  • The second source for preference change,
    self-consistency, has a robust psychological
    foundation and has been widely used in this
    discipline. (In economics, see for instance,
    Kuran, 1995 and Kuran and Sandholm , 2007).

10
Related Literature
  • We have already mentioned the economics
    literature on conformity and endogenous social
    norms.
  • Literature on Peer effects and Social Networks
    (for example, Cabrales, Calvó-Armengol and Zenou,
    2009)
  • There are a few works analyzing corporate culture
    in a dynamic model. See, Kandori, 2000 and Rob
    and Zemsky, 2002.
  • These are effort models and their main goal is
    to analyze the interplay between norms and
    monetary incentives. But none of them includes
    the possibility for the firm of investing in
    socialization.
  • Cultural transmission literature.
  • Cordes, Richerson, McElreath and Strimling, 2006
    analyze how an entrepreneur can shape human
    behavior within a firm. They model it as biased
    transmission of cultural contents via social
    learning process.

11
We are interested in the long-run outcomes of
this dynamics and in particular in the ability of
P to fully instill the corporate culture in the
members of the organization.
  • Dynamics
  • Principal wants to maximize in each period t
  • Utility of player i

12
Questions
  • Under what conditions (if any) the ideal
    preference of each agent coincides in the steady
    state of the dynamics with the ideal action of
    the Principal for all i?
  • In case there is no perfect convergence to the
    preferred actions of P, we want to know how
    different parameters influence a measure of the
    success of P.

13
1. Solving the N-player game
  • Pure Strategy Nash Equilibrium. Best- Response
    functions

Homogeneous case
14
2. Computing the steady state
  • Given
  • Maximum
  • Steady states

15
  • Does the principal succeed in imposing the
    preferred action?
  • Answer? Only if
    (homogenous case).
  • Which is the action Si taken by the agent?
  • Solve a third degree equation
  • Self-consistency equation
  • Degree of success

16
RESULT
  • - If P has the same ideal action for all the
    organization, then in the unique steady state of
    the dynamics, P succeeds in instilling this ideal
    action.
  • - But, if P has different ideal actions for the
    agents, then there is not a steady state where P
    succeeds.

17
FURTHER RESEARCH
  • - boundaries of the organization (a single or
    separate organizations?).
  • - team initial composition (recruitment).
  • - robustness (exogenous shock on the preferred
    actions).
  • - a forward looking Principal.
  • - an effort model.

18
SIMULATIONS
Iterate basic evolution equations
Initial conditions
0
-e
e
(
)
(
)
Sit0
19
Parameters N100, ?1, ß2, ?0.5 e, d,
Focus on -Time evolution of -Degree of
success
-Heterogeneity of population
-Average socialization effort
20
s
t-1/2
t-1
sx
t
21
t-1/2
sx
t
22
s
t-1/2
sx
23
s
e10
e1
t
24
e10
e1
t
25
s
t
26
s
sx
t
27
s
sx
t
28
N100
s
d
29
N1000
s
d
30
FURTHER RESEARCH
  • Include time-dependent ideals.
  • Heterogenous agents with different ?i .
  • A single organization or separate organizations
    the boundaries of organizations.
  • More economic structure an effort model.
    Analysis of the interaction between monetary
    incentives and socialization.

31
THANKS!
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