Organizational Economics. Coordinating Communication

Leadership Communication

Seminar Paper 2013 22 Pages

Business economics - Business Management, Corporate Governance



1. Introduction

2. Leadership and hierarchy
2.1. Importance of Leadership
2.2. Leadership Enhancing factors

3. Communication and the proper use of it
3.1. Influential Communication
3.2. Useful Communication to enhance coordination
3.2.1. It’s what you say, not what you pay
3.2.2. Words speak louder than money

4. Summary

5. Literature

6. Affidavit


Experiments have played an important role throughout human history and are still important in nearly every field humans are interested in. Physical phenomena like electricity for example and other ideas surrounding the modern environment were invented after experimenting and searching for the relevant answers (e.g. Priestley, 1779). The main goal of experiments is to provide a test of a theory or hypotheses in a carefully designed and controlled environment. In contrast to empirical field research, experiments that are conducted in the laboratory have the key feature that the researcher exerts control over the endogenous variables. This wouldn`t be the case in the field because of the complexity. The research area that examines the aspects of organizational structure and economic performance is called Experimental Organizational Economics. Camerer and Weber (2007) define organizational experiments as experiments with two or more subjects that engage in a productive enterprise where the impact of the structure and incentives on productivity, through the characteristics and choices of subjects, are the variables of central interest. These lab experiments have usually a simple design. Although the findings cannot be transmitted one to one to the complex real world, in science it is usually surprisingly useful to start with the simplest cases, than generalize (basic genetics where first understood by studying fruit flies) and, considering that some organizations are simple (like start-up companies with a small number of employees and infrastructure), it is a realistic approximation. Camerer and Weber (2007) did a survey analyzing papers of Experimental Organizational Economics in four areas of interest to organizational economists:

a) theories of incentives and worker effort
b) voluntary effort and reciprocity
c) coordination
d) leadership and hierarchy

The survey discusses and presents experimental research, focusing on a few important key experiments. For the purpose of this seminar thesis, the area of leadership and hierarchy will be of main interest. In order to give an overview, the results of the experiments of the survey in section d) are presented and discussed, especially the communication that is used to in order to coordinate the employees’/ subordinates’/ colleagues’ actions, which is the main point of consideration in this thesis. First, the importance of the existence of a leader is discussed in combination with leadership-enhancing factors. Afterwards, there is shed light on the power human language has to influence people to make the point that more studies about communication and the use of it should be done, in order to improve current results. To discuss that point, studies testing the effect communication has on coordination are presented in detail, discussing the design, the results and the interpretations of the results.

2.Leadership and hierarchy

2.1.Importance of Leadership

Selznick (1957, 2) states that “an understanding of leadership in both public and private organizations must have a high place on the agenda of social inquiry.” The competitive global economy is complex, challenging and full of opportunities and threats. Enhancing the firm’s performance and competing in turbulent and unpredictable environments is supported by effective strategic leadership (Ireland & Hitt, 1999). In a study, Moxnes & van der Heijden (2003) found out that there is a significant (within-subject) effect of leadership in a public bad experiment. Followers invest around 13% less in the public bad (on average) at situations when a leader is setting the good example contrary to situations without a leader. Furthermore, leadership can be viewed as a special aspect of hierarchy. Every organization, no matter how big or small, has some hierarchical structure in which authority relations substitute for price mechanisms and contract. Hierarchical superiors usually have residual control rights and authority over what their subordinates do. Values and broad strategic directions which both affect subordinates are shaped by leaders in an extremely implicit contract (Camerer und Weber, 2007). Thus, there is great evidence of the importance of leadership, and the next step is to discuss experiments which give possible answers for how the leader should behave in order to gain more productivity and affect organizational behavior in a positive way. The following experiments shed light on how organizational behavior and productivity are being affected by hierarchy and leadership.

2.2.Leadership Enhancing factors

Especially in repeated public goods games with no hierarchy and shared output, the common findings are that individual effort is quite on a high level, and begins to decline strongly towards the end of the game (Nalbantian and Schotter, 1997). This free riding directly results in a sharp decline in the net total payoff. If the players would contribute consistently to the public good, they all (the society) would benefit. According to Homann (2002, 47) the rules of the game must change in order to achieve a paretosuperior Nash-equilibrium. Nalbantian and Schotter (1997) changed the rules of the public good game by providing a randomly chosen player with the power to chose both his own contribution to the group and to distribute the output to all other players as he wishes. The findings show that workers who shirked typically earn nothing and output is divided accordingly by the leader between those who exerted effort. These findings show that institutional rules play a major role in cooperation, hence in output management and overall satisfaction of the society. In combination with the ability to punish asocial behavior, the readiness to cooperate is greatly enhanced, as Brandt, Hauert & Sigmund (2003) show in their experiment. In order to achieve these results, there must be a person coordinating and carrying out the necessary action, hence the need for a leader. Güth, Levati, Sutter & van der Heijden (2004) combined the positive effect resulting from punishment with signaling. In a public goods game, each player has 25 tokens, with a private return of 1 and a public return of 1.6. In the mere signaling condition, a player visible moves first. This has an (weak) positive effect, average contributions are about 3 units higher. Combined with the ability of the leader to punish a free rider (the chosen free rider earns nothing) the contributions increase substantially, even over longer periods. Another important characteristic of efficient leadership was pointed out by Potters, Sefton and Vesterlund (2007). In a voluntary contribution game, choices are made simultaneously or sequentially. Consistent with recent theories they find that leading-by-example increases contributions and earnings in an environment where a leader has private information about the returns from contributing. They found out that the followers contribute 81% of the time when leaders contribute, considering there is asymmetric information and the leader is a first-mover (signaling). Field experiments also show the positive effect that can result from signaling (Silverman et al., 1984; Shang and Croson, 2003; Soetevent, 2005). In another study, List and Lucking Reiley (2002) found out that the higher the seed money in fundraising, the higher the subsequent contributions, which is also a form of signaling.

Another way leaders affect (positive) outcomes is by coordinating the subordinates’ activities (see, e.g. Bolton, Brunnermeier & Veldkamp, 2008; Brandts & Cooper, 2006). There are several strategies that may help to produce an efficient coordination. Like Brandts and Cooper (2006) have shown, financial incentives can be used to overcome coordination problems. They showed that in an initial phase weak link game, the coordination level is very low, and the individual actions lead to an inefficient outcome. Then a manipulation of the financial incentives resulted in an increase in the benefits, which in turn lead to improved coordination. That’s a typical pattern that goes along with the standard economic assumption that experimental subjects do not work for free and work harder, more persistently, and more effectively, if they earn more money for better performance (see Camerer and Hogarth, 1999). While financial incentives are important, they are not always solely yielding the desired results, especially in weak link games, where the higher coordination focal point yields a higher financial output, but still isn`t reached consistently. The next chapter illustrates a powerful coordination device in order to overcome and improve the missing parts that financial incentives aren’t able to achieve alone: the (human) language and the proper use of it. The proper use of the language of the leader is another tool to enhance his leadership qualities and coordination abilities.

3.Communication and the proper use of it

3.1.Influential Communication

Communication can have a widespread influence. For example organizational communication and the way it is perceived has a significant impact on job satisfaction and job performance. The same facets of communication - supervisor communication, communication climate, and personal feedback - were found to be most strongly related to both job satisfaction and performance (Pincus, 2006; see also Madlock, 2012). Morris and Snyder (1984, 2) conducted a study in which their “results indicate that 2 perceived communication variables, the quality of supervisory communication and information exchange within the peer workgroup, were strongly related to critical revenue and workload measures of [the] overall organizational performance.” Language can thus be used to influence people. Getting people to coordinate more efficiently is also a form of influence, namely influencing their behavior to a goal chosen by someone (typically the manager). There are several ways of using language in a certain way to achieve the wanted results. The employment of ambiguities during speeches for example is not only found during hypnosis sessions to guide the client in a specific direction (Erickson, 1965), but foremost in today’s political environment. Ambiguities allow the politician/ political leader to alter the meaning of his statements without altering the statements themselves. The politician is then in a position to say/ write a single statement with numerous meanings; if this statement/ these statements are chosen carefully, they will say to each listener exactly what they want to hear. Because it appears that the politician is addressing specifically the listeners (in this case the voters) needs, they will be manipulated into supporting the political candidate. For example, during the presidential campaign in 1976 Jimmy Carter used the ambiguous term ‘windfall profits’. This term has a different meaning for different individuals. He informed the public that his energy program won’t allow the major oil firms to acquire ‘windfall profits’. “To the average voter, Carter's statement means that the oil firms will not be permitted to acquire excessive profits, e.g. to increase profits by 600-800% in one year, as occurred in 1973. To the management of the oil firms, Carter's statement means that the firms will not enjoy unexpected good fortune profits. Carter's statement suggests to the voters a world in which the price of gasoline will not be artificially high. The same statement suggests to the oil firms a world in which they can enjoy very high profits, but such profits must be earned. Carter's introduction of 'windfall profits' as an ambiguous concept thus provides the means for generating a statement which has alternative meanings.” (Raimond Dacey, 1979, 266). This example shows clearly the power the use of certain language-patterns has. In order to influence subordinates to coordinate on both personal and organizational levels in the organizational context, Brandts and Cooper (2007) point out that communication in general helps to overcome coordination problems in a game where classic theory normally would predict inefficient coordination. They found out that a special content of the language used was more helpful to achieve the desired results. The following studies are quite simple in their lab design, but they should be viewed like the fruit flies mentioned above



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University of Frankfurt (Main)
organizational economics coordinating communication leadership




Title: Organizational Economics. Coordinating Communication