Article | American Economic Review | March 2010

Interpersonal Authority in a Theory of the Firm

by Eric J. Van den Steen

Abstract

This paper develops a theory of the firm in which a firm's centralized asset ownership and low-powered incentives give the manager, as an equilibrium outcome, interpersonal authority over employees (in a world with open disagreement). The paper thus provides micro-foundations for the idea that bringing a project inside the firm gives the manager control over that project, while explaining concentrated asset ownership, low-powered incentives, and centralized authority as typical characteristics of firms. The paper also leads to new perspectives on the firm as a legal entity and on the relationship between the Knightian and Coasian views of the firm. (JEL L22, D23, D81)

Keywords: Theory; Assets; Ownership; Motivation and Incentives; Governance Controls; Power and Influence; Projects; Perspective; Employees;

Citation:

Van den Steen, Eric J. "Interpersonal Authority in a Theory of the Firm." American Economic Review 100, no. 1 (March 2010): 466–490.