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Explicit and Latent Authority in Hierarchical Organizations

  • Rene van den Brink
  • Robert P. Gilles

In this paper we consider the problem of the control of access to a firm's productive asset, embedding the relevant decision makers into a general structure of formal authority relations. Within such an authority structure, each decision maker acts as a principal to some decision makers, while she acts as an agent in relation to certain other decision makers. We study under which conditions decision makers decide to exercise their own authority and to accept their superiors' authority. We distinguish two types of behavior within such an authority situation. First, we investigate a non-cooperative equilibrium concept describing the explicit, myopic exercise of authority. We find that if monitoring costs are sufficiently small, such explicit authority is exercised fully. Second, we consider the possibility of subordinates to submit themselves to authority even though such authority is not enforced explicitly. Again for sufficiently small monitoring costs such latent authority can be supported as an equilibrium

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 393.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:393
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  1. Prescott, Edward Simpson & Townsend, Robert M., 2002. "Collective Organizations versus Relative Performance Contracts: Inequality, Risk Sharing, and Moral Hazard," Journal of Economic Theory, Elsevier, vol. 103(2), pages 282-310, April.
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  7. Derks, Jean J M & Gilles, Robert P, 1995. "Hierarchical Organization Structures and Constraints on Coalition Formation," International Journal of Game Theory, Springer, vol. 24(2), pages 147-63.
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  11. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 83-114, January.
  12. van den Brink, J.R. & Gilles, R.P., 1991. "Axiomatizations of the conjunctive permission value for games with permission structures," Research Memorandum FEW 485, Tilburg University, School of Economics and Management.
  13. Raghuram G. Rajan & Luigi Zingales, 2001. "The Firm As A Dedicated Hierarchy: A Theory Of The Origins And Growth Of Firms," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 805-851, August.
  14. Roth, Alvin E, 1977. "The Shapley Value as a von Neumann-Morgenstern Utility," Econometrica, Econometric Society, vol. 45(3), pages 657-64, April.
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  17. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  18. Gilles, Robert P & Owen, Guillermo & van den Brink, Rene, 1992. "Games with Permission Structures: The Conjunctive Approach," International Journal of Game Theory, Springer, vol. 20(3), pages 277-93.
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  26. Gilles, R.P. & Owen, G., 1999. "Cooperative Games and Disjunctive Permission Structures," Discussion Paper 1999-20, Tilburg University, Center for Economic Research.
  27. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-61, October.
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