Authors: Robert Dur, Ola Kvaløy and Anja Schottner
Abstract: Why do some leaders use praise as a means to motivate workers, while other leaders use punishment? This paper develops a simple economic model to examine how leadership styles depend on the prevailing labor market conditions for workers. We show that non-competitive wage-setting (e.g., trade union wage bargaining or minimum wage
legislation) makes the use of social punishment more attractive for leaders, particularly when the worker earns a high rent and the punishment is very harmful to workers. While the use of social punishments generally reduces joint welfare, it lessens the need for high bonus pay, which allows the leader to extract rents from the worker. In contrast, leaders only use praise when it is socially efficient, independent of labor market conditions. Finally, we show that credible use of leadership styles requires that the leader has the right social preferences, at least in a one-shot game. The use of praise requires a moderately altruistic leader, while the use of social punishment requires a moderately spiteful one.
