Informal Authority in Organizations
George P. Baker
HBS Negotiations, Organizations and Markets Unit; National Bureau of Economic Research (NBER)
Robert S. Gibbons
Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)
Kevin J. Murphy
University of Southern California - Marshall School of Business; USC Gould School of Law
Journal of Law, Economics and Organization, Vol. 15, No. 1, Spring 1999
We assert that decision rights in organizations are not contractible: the boss can always overturn a subordinate's decision, so formal authority resides only at the top. Although decision rights cannot be formally delegated, they might be informally delegated through self-enforcing relational contracts. We examine the feasibility of informal authority in two informational environments. We show that different information structures produce different decisions not only because different information is brought to bear in the decision-making process, but also because different information creates different temptations to renege on relational contracts. In addition, we explore the implications of formal delegation achieved through divestitures.
JEL Classification: J54, D21, D23, L22
Date posted: May 17, 1999
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