Incentives and management styles

- When moral hazard problems are mild, the manager can be biased in favor of micro-management.
- When moral hazard problems are severe, the manager can be biased toward macro-management.

In a principal-agent framework, we explain different managing styles. In our model, there are two vertical tasks - an upstream task for improving the project's potential environment, and a downstream task for implementing the project. The downstream task must be done by the worker, but the upstream task can be done by either the manager or the worker. An effort for the upstream task is a hidden action of the party in charge of the task. The realized project environment is the manager's private information. We show that, when the upstream task is easy, the manager may assign the task to herself, even if her opportunity cost is larger than the worker's (a bias in favor of micro-management). When the upstream task is hard, by contrast, the manager may assign the task to the worker, even if her opportunity cost is smaller than the worker's (a bias in favor of macro-management). We also discuss distortions in the project output schedules in each case to show that the central trade-off is efficiency in task allocation versus efficiency in project output.