Akerlof, Robert J. (2017) The importance of legitimacy. The World Bank Economic Review, 30 (Supplement 1). S157-S165. doi:10.1093/wber/lhw009

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Abstract

Within organizations, there are typically limits to leaders' legitimacy. This article explores how organizations are structured in the face of such constraints. The concept of legitimacy is formalized in the context of a single-agent moral hazard model. The principal can give the agent monetary incentives; in addition, he can give the agent an order. The agent finds it costly to disobey orders provided they are legitimate. We find that it may be optimal for the principal to take costly actions to bolster legitimacy. We argue that many organizational phenomena can be understood as attempts to bolster legitimacy. Examples include: rejection of overqualified workers, bureaucracy, merger decisions, and above-market-clearing wages.

Item Type:	Journal Article
Subjects:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Moral hazard -- Mathematical models, Leadership, Consolidation and merger of corporations, Authority
Journal or Publication Title:	The World Bank Economic Review
Publisher:	Oxford University Press
ISSN:	0258-6770
Official Date:	1 March 2017
Dates:	Date Event 1 March 2017 Published 12 April 2016 Published
Volume:	30
Number:	Supplement 1
Page Range:	S157-S165
DOI:	10.1093/wber/lhw009
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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