A Model of Leadership: Insiders versus Outsiders∗

Leadership is a combination of the ability to make good decisions and to motivate subordinates. If subordinates have their own information about the quality of their leaders’ options, these two objectives might conflict with each other. Using a model in which a leaders’ ability to make good decisions is private information we show how this conflict leads to inefficient decision–making. Depending on whether the leader is an insider who observes the subordinates information or an outsider with respect to whom the subordinates information is private, two different types of inefficiencies exist. We show that an insider will follow the information of worse informed subordinates in order to improve the subordinates’ belief in the leader’s decision. On the other hand an outsider with sufficiently high ability will refrain from consulting his subordinates in order to signal that he is well informed, although the subordinates’ information might improve the leader’s decisions. Comparing these two inefficiencies quantitatively will have implications for the question of organizational design. ∗We are grateful to Michele Piccione and Andrea Prat for their guidance during our PhD studies at the London School of Economics. We also thank Gilat Levy, Margaret Meyer, George Baker and participants of the PIPPS conference in Bristol, 2003 for valuable suggestions. †London School of Economics and Political Science. Email: [email protected] ‡London School of Economics and Political Science. Email: [email protected]