What Do Managers Do?

Economists have been thinking for a long time about the operation of buying and selling in markets. However, they have traditionally spent less time studying what happens inside a firm–a setting in which forces of supply and demand are replaced by managerial decision-making. Anyone who has had both a good boss and bad boss knows that it makes a difference, but how and why? Alan Benson and Kathryn Shaw tackle the research on this question in “What Do Managers Do? An Economist’s Perspective” (Annual Review of Economics, 2025, 17: 635-664).  They write:

Economic activity requires motivating and coordinating individuals to work toward a common goal. These aims are the purview of managers. What, however, do managers actually do? We outline three defining principles of economic research on managers—technological determinism, skill distinction, and managerial self-interest—and relate them to the set of skills reported by managers on LinkedIn. We highlight “managers of people” and “managers of projects” as a useful distinction for categorizing theoretical, empirical, and descriptive accounts of managers. In light of our three principles, we review research on how managers can create value—namely, by hiring, retaining, training, monitoring, evaluating, allocating, and supervising. We propose that managers apply these skills in different proportions depending on the production technology in which they are embedded …

Empirical studies in this literature often involve finding data from within companies. For example, consider a company with a group of middle managers, all at the same level in the hierarchy, who oversee groups of workers. Moreover, say that workers sometimes are shifted from one manager to another, as business needs evolve. It may become apparent that most workers perform with higher productivity under some managers than others. What are some of the main themes that emerge from this research?

In hiring decisions, the evidence suggest that few managers are good at screening potential workers. A fairly robust literature finds that more productive workers are hired by a process that involves some mixture of highly structured interviews (so that answers are more comparable across applicants) or specific testing, or by direct observation of the person doing the job, when that is possible. But managers do a better job of hiring if the have incentives to overcome the biases that lead them to prefer hiring from their own friend-groups, social groups, or ethnic groups.

In retention of existing workers: “Perhaps the clearest evidence linking people skills and retention is provided by Hoffman & Tadelis (2021). Using data from a large high-tech firm, they find that survey-measured people management skills are highly correlated with greater subordinate retention: Replacing a manager at the 10th percentile in measured people skills with one at the 90th percentile corresponds to a 60% reduction in overall turnover and to declines in turnover among workers estimated to be high performers.” Retention is often easier when a worker and manager share a characteristic: for example, female managers are generally better at retaining female workers. There is also evidence that managers who are encouraged to focus on retention can often improve on this dimension.

In training and mentoring: “Sandvik et al. (2020) provide one of the most comprehensive recent field studies of how managers create value through training. They examine sales agents whose productivity may be tracked by revenue per call. Managers are responsible for improving sales agents’ performance through formal training, probationary screening, and ongoing feedback. Importantly, managers can encourage development by managing workplace knowledge flows, including by setting up policies that encourage peer learning from the best performers.” When it comes to mentoring, the approach that produces more productiv workers seems to be regular, mandatory, and broad-based mentoring, rather than selecting a smaller number of people for mentoring.

In the area of motivation: “For instance, Lazear et al. (2015) estimate a two-way fixed effect model in the context of supervisors of workers doing routine tasks. They find that the difference in productivity under a 90th-percentile manager and a 10th-percentile manager is equivalent to the productivity from an additional worker. Benson et al. (2019) estimate manager value added from the manager fixed effects in a regression with salesperson productivity. They find large differences in the productivity of sales workers under different managers: A worker under a 75th-percentile manager has nearly five times the sales of one under a 25th-percentile manager, which is approximately half the raw sales gap between workers at these quartiles.” Some of these differences in managerial ability seem traceable to differences in the “prosocial” skills of managers.

In the area of evaluating and monitoring, the research takes a certain need to limit cheating and shirking for granted, but focuses more broadly on how a manager can improve productivity fair process of evaluation can help in “providing workers with greater autonomy, enablement, and incentives for reaching prespecified outcomes, except in situations where a manager’s monitoring and supervision are required to check moral hazard Much of what economists refer to as monitoring also falls under what practitioners refer to as performance management, highlighting contemporary organizations’ emphasis on using evaluations for the dual purpose of evaluation and professional development (i.e., identifying and training high-ability workers).”

In the area of allocating, economists are familiar with the idea of “good matches” between workers and jobs that happen through markets, but managers often have the challenge of matching existing worker within the firm to the tasks that need to be done. For example: “Using data featuring manager job rotations at a large multinational company, Minni (2023) finds that good managers, defined as those revealed to be good by quick subsequent promotion, more actively move their subordinates both laterally and vertically and enhance their productivity and future advancement. Adhvaryu et al. (2022a), using data from an Indian garment plant, find that the most attentive managers enhance productivity by reassigning workers in response to particulate matter pollution.”

Economists probably still focus more on buying and selling within markets than on what happens inside firms, but digging into the inner workings of firms is becoming more common. This makes sense. Herbert Simon (Nobel 1978) wrote an essay on “Organizations and Markets” for the Journal of Economic Perspectives (where I work as Managing Editor) back in 1991, argued for the importance of looking inside the organizations of firms with a (to me) memorable metaphor. Simon wrote:

A mythical visitor from Mars, not having been apprised of the centrality of markets and contracts, might find the new institutional economics rather astonishing. Suppose that it (the visitor—I’ll avoid the question of its sex) approaches the Earth from space, equipped with a telescope that reveals social structures. The firms reveal themselves, say, as solid green areas with faint interior contours marking out divisions and departments. Market transactions show as red lines connecting firms, forming a network in the spaces between them. Within firms (and perhaps even between them) the approaching visitor also sees pale blue lines, the lines of authority connecting bosses with various levels of workers. As our visitor looked more carefully at the scene beneath, it might see one of the green masses divide, as a firm divested itself of one of its divisions. Or it might see one green object gobble up another. At this distance, the departing golden parachutes would probably not be visible.

No matter whether our visitor approached the United States or the Soviet Union, urban China or the European Community, the greater part of the space below it would be within the green areas, for almost all of the inhabitants would be employees, hence inside the firm boundaries. Organizations would be the dominant feature of the landscape. A message sent back home, describing the scene, would speak of “large green areas interconnected by red lines.” It would not likely speak of “a network of red lines connecting green spots.” …

When our visitor came to know that the green masses were organizations and the red lines connecting them were market transactions, it might be surprised to hear the structure called a market economy. “Wouldn’t ‘organizational economy’ be the more appropriate term?” it might ask. The choice of name may matter a great deal. The name can affect the order in which we describe its institutions, and the order of description can affect the theory. In particular, it may strongly affect our choice of the variables that are important enough to be included in a first-order theory of the phenomena.

The post What Do Managers Do? first appeared on Conversable Economist.