Social exchange and common agency in organizations

We study the relation between formal incentives and social exchange in organizations where employees work for several managers and reciprocate a manager’s attention with higher effort. To this end we develop a common agency model with two-sided moral hazard. We show that when management attention is not contractible, the first-best can only be achieved by granting autonomy to employees together with incentive pay for both managers and employees. When neither attention nor effort are contractible, an ‘attention race’ arises, as each manager tries to sway the employee’s effort his way. While this may result in too much social exchange, the attention race may also be a blessing because it alleviates managers’ moral-hazard problem in attention provision. Lastly, we show how organizational structure can be used to motivate managers and employees in the absence of formal incentives.