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Publications
  • 2007
  • Working Paper

Interpersonal Authority in a Theory of the Firm

By: Eric J. Van den Steen
  • Format:Print
  • | Language:English
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Abstract

This paper develops a theory of the firm in which a firm's centralized asset ownership and low-powered incentives give a manager 'interpersonal authority' over employees (in a world with differing priors). The paper derives such interpersonal authority as an equilibrium phenomenon. One key result is that a manager's control over critical assets - through its effect on the level of outside options - allows the manager to order employees what to do. The paper thus provides micro-foundations for the idea that bringing a project inside a firm gives the manager authority over that project, while - in the process - explaining concentrated asset ownership, low-powered incentives, and centralized authority as typical characteristics of firms. It also leads to a new perspective on the firm as a legal entity and, building on the insights of a parallel paper, to a new theory for firm boundaries based on the idea of break-up. A key feature of the latter theory is that firm boundaries matter even though both ex-ante investments and ex-post actions are perfectly contractible.

Keywords

Governance Controls; Employee Relationship Management; Managerial Roles; Motivation and Incentives; Boundaries; Theory

Citation

Van den Steen, Eric J. "Interpersonal Authority in a Theory of the Firm." Sloan School of Management Working Paper, No. 4667-07, July 2007. (Available at SSRN.)
  • SSRN

About The Author

Eric J. Van den Steen

Strategy
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