ABSTRACT:We link two elements of organizational design, the delegation of decision-rights and the provision of incentives, to the behavior and human capital formation (e.g. learning) of lower-level employees. We exploit a field-research setting in which employees' use of decision rights can be directly measured and traced to performance outcomes. We document implicit incentives in the form of sharp increases in employee termination linked to -excessive‖ use of decision-rights. We find that these implicit incentives are strongest for employees in business units which monitor the use of decision-rights most closely (e.g. -tight monitoring‖). We document two broad behavioral effects for employees that are consistent with implicit incentives in tighter monitoring environments: (1) they are less likely to use discretion in exercising decision-rights; (2) they are less likely to adjust for local information, including historical performance data, in their decision-making. Finally, we document strong learning effects among lower level employees in our setting. However, these learning effects are concentrated among employees in -loosely monitored‖ business units and almost entirely absent in -tightly monitored‖ business units. The results are consistent with an experimentation hypothesis in which tight monitoring of decision-rights leads to fewer deviations from prescribed decision rules and less learning. We thank Srikant Datar, Ranjani Krishnan, Greg Miller, Joe Weber, and participants at the Harvard Junior Faculty Conference for helpful com m ents. All errors rem ain our ow n.
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