Trust and the Delegation of Real Authority

Abstract

Using a unique employee-establishment matched survey, we find a causal relationship between an individual employee’s trust of management and the delegation of real authority. We utilize both fixed effects and instrumental variables to control for unobserved factors: establishment-level fixed effects control for management quality, practices, culture and other characteristics; our instruments of inherited trust in management and employee disability address the possible endogeneity of employee trust. Across all specifications, we find that delegation of real authority is more likely if an employee trusts management. Our results are consistent with the theoretical literature on delegation; in particular, when contracts are incomplete trust between a principal and an agent can sustain delegation when it would not otherwise be possible.

Keywords: Trust, Real Authority, Delegation, Relational Contracts

JEL Classification: D23, L22, L23