Dont ask why things went wrong Nested Reputation and Scapegoating Ine¢ ciencyy

Scapegoating is a source of ine¢ ciency in organizations. This is a commonly held view. But despite its commonality and its use as a justi…cation for reforms designed to reduce scapegoating, no formal model has been developed to explain why and when this is the case. We propose an explanation by focusing on how superiors make decisions inside an organization when they only care about reputation. Consider delegation choices, for example. The hiring of e¢ cient workers may be a good idea if successful production is the only way to build reputation. But if successful scapegoating also increases reputation, superiors will tend to hire less e¢ cient workers since they are easier to blame if something goes wrong. In this context, scapegoating is a "nested" activity that only occurs after bad outcomes. Its results do not directly a¤ect the welfare of society but indirectly a¤ect the decisions governing the probability of success in production. We also examine "nested" activities following good outcomes and show how these can increase e¢ ciency without relying on costly incentives. This "nested reputation" game also predicts that in good times superiors tend to hire more e¢ cient workers than in bad times, a feature we call "Machiavellian E¤ect".