Essays on the role of middle managers in organizations

Abstract

Middle managers often play a complicated role within organizations. This dissertation consists of two chapters, which investigate two specific challenges faced by middle managers: managing workers' performance and allocating human capital.

The first chapter studies the optimal way for middle managers to manage performance by dynamically enforcing rules. Although rules are often seen as rigid, their enforcement can be flexible. We develop a relational contract model between a manager and a worker to characterize how rules are dynamically enforced. We show that rules can improve the manager's payoff if and only if the enforcement cost is below a threshold. When the cost is sufficiently low, the optimal relational contract shows a pattern of cycling between rule enforcement and worker autonomy. When the cost is moderate, rule is only enforced in the beginning of the relationship. Interestingly, when rules can be enforced after the worker's participation, a higher enforcement cost may benefit the manager.

The second chapter develops a relational contracting model to study how the managers can best motivate and keep their workers when the worker's promotion opportunity is the manager's private information. Managers would like to keep the capable workers as long as possible. But doing so unduly will de-motivate the worker. The optimal relational contract has three phases: Hoarding, Promotion, and Coasting. In the first phase, talent hoarding occurs so that the worker will not get promoted even if the promotion opportunity is available. Effort is efficient while job allocation is not. In the second phase, the worker exerts effort and gets promoted when there is an opportunity. Both effort and job allocation are efficient. In the third phase, the worker gets promoted when there is an opportunity, but he will not put in effort. Job allocation is efficient while effort is not. While the total working duration remains the same, more capable workers suffer from more severe talent hoarding. A higher frequency of opportunity empowers the manager to make better promise, leading to more talent hoarding.