An economic theory of leadership styles

This paper studies the role of leadership style in providing incentives to subordinates. A leadership style is characterized by its degree of decentralization of tasks and its degree of empathy towards subordinates’ interests. I analyze the optimal leadership style in an incomplete contract framework in which the agent as well as the principal jointly have to solve decision problems and implement their solutions. I show that the optimal leadership style crucially depends on the environment (structure of decision problems and associated payoffs) as well as on the agent’s personality (incentive alignment and competence). Moreover, I examine how monetary incentives influence the optimal leadership style.