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Article | American Economic Review | March 2010

Interpersonal Authority in a Theory of the Firm

by Eric J. Van den Steen

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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 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;

Format: Print 25 pages Find at Harvard

Citation:

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

About the Author

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Eric J. Van den Steen
Royal Little Professor of Business Administration
Strategy

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More from the Author

  • Chapter | The Palgrave Encyclopedia of Strategic Management | 2018

    Irreversibility

    Pankaj Ghemawat and Eric J. Van den Steen

    Citation:

    Ghemawat, Pankaj, and Eric J. Van den Steen. "Irreversibility." In The Palgrave Encyclopedia of Strategic Management. Continuously updated edition, edited by Mie Augier and David J. Teece. Palgrave Macmillan, 2018. Electronic.  View Details
    CiteView DetailsFind at Harvard Register to Read Related
  • Working Paper | HBS Working Paper Series | 2019

    Birds of a Feather ... Enforce Social Norms? Interactions Among Culture, Norms, and Strategy

    Hongyi Li and Eric J. Van den Steen

    This paper analyzes how shared beliefs and preferences (or values) cause the emergence of social norms; why people may enforce norms that go against their own beliefs and preferences/values; and how this may cause a disconnect to develop between the organization's norms and its underlying beliefs and preferences. We further show, among other things, that such social norms are more likely in attractive organizations, for behaviors that have modest personal consequences, and in organizations where employees depend on others' choices to a moderate degree. We finally discuss how these mechanisms help our understanding of culture change and of the interaction between culture and strategy. We argue that culture is not only an input to strategy, but also a substitute and a potential competitor.

    Keywords: culture; norms; Values and Beliefs; Organizational Culture; Strategy;

    Citation:

    Li, Hongyi, and Eric J. Van den Steen. "Birds of a Feather ... Enforce Social Norms? Interactions Among Culture, Norms, and Strategy." Harvard Business School Working Paper, No. 20-045, October 2019.  View Details
    CiteView DetailsSSRN Read Now Related
  • Case | HBS Case Collection | February 2018 (Revised July 2019)

    SoulCycle: The Road Ahead

    Ashish Nanda, Eric Van den Steen and Jeffrey Boyar

    Julie Rice and Elizabeth Cutler founded SoulCycle, an indoor cycling studio chain, in 2006 as more than a health club; they wanted it to become a lifestyle brand that would “empower riders in an immersive fitness experience.” By early 2015, SoulCycle had grown to 38 studios in seven metropolitan areas. In March 2015, Equinox, a luxury fitness company that had financed SoulCycle’s expansion in 2011, approached the co-founders with an offer to buy them out for $90 million each. It was an attractive offer but one that would also likely circumscribe their responsibilities. Rice and Cutler had to decide whether to accept the Equinox offer as a prelude to smaller roles at the firm (even potential exit) or continue investing time, energy, and financial resources in growing the business.

    Keywords: fitness; fitness industry; exercise; cycling; boutique fitness; exit strategy; Growth; bicycles; retail; pricing; community; SoulCycle; vision; Health; Leadership; Strategy; Marketing; Decision Making; Health Industry; United States;

    Citation:

    Nanda, Ashish, Eric Van den Steen, and Jeffrey Boyar. "SoulCycle: The Road Ahead." Harvard Business School Case 718-499, February 2018. (Revised July 2019.)  View Details
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