Leadership and Organizational Hierarchies

Abstract

To understand leadership, it is necessary to understand the purpose of an organization. Organizations are hierarchies with leaders at the top. Why do we have leaders instead of an algorithm making decisions? The theory of the firm recognizes benefits to centralizing authority but these organizational benefits from hierarchy have not been clearly separated from the specific contributions of leaders. Leadership is the ability to successfully manage transaction costs of an organization. Prominent amongst organizational transaction costs are agency and coordination costs. The balance between these two types of costs depends on the purpose of the organization. We hypothesize that changing leaders is likely to have a larger effect within organizations with relatively lower scope or scale of purpose because of the way in which decision rights tend to be relatively concentrated in such organizations. We test our hypotheses with data on NFL coaches, and deans of business and law schools.