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The Journal of Law, Economics, and Organization V15 I1
© 1999 Oxford University Press

Article

Informal authority in organizations

G Baker0, R Gibbons1 and KJ Murphy2

0 Harvard Business School
NBER
1 MIT
NBER
2 University of Southern California, CA, USA

Abstract

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.


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