Leadership Styles and Labor Market Conditions

Why do some leaders use praise as a means to motivate workers, whereas other social punishment? This paper develops simple economic model examine how leadership styles depend on the prevailing labor market conditions for workers. We show that existence of binding wage floor workers (e.g., due trade union bargaining, minimum legislation, or limited-liability protection) can make it attractive firms hire leader who makes punishment. Although punishments generally is socially inefficient, lessens need high bonus pay, which allows firm extract rents from worker. In contrast, provide only if efficient so. Credible requires either repeated interaction with right preferences. single-period setting, moderately altruistic motivation tool, spiteful Lastly, we when leaders’ and workers’ reservation utilities give rise bigger income gap between attracting becomes relatively less costly unfriendly more prevalent. was accepted by Axel Ockenfels, behavioral economics decision analysis.