Authority and Discretion: Tensions, Credible Delegation, and Implications for New Organizational Forms

We analyze a key problem in organization theory and design, namely the potential tension between authority (i.e., the power to make decisions which guide the decisions of another person) and the discretion of employees (i.e., the ability of an agent to control resources including his own human capital). The problem is rooted in the fact that in organizations, decisions rights are always loaned rather than owned; a hierarchical superior can always in principle overrule a hierarchical inferior. We provide an integrative treatment of the tensions that are involved in the interaction between authority and discretion, and the motivational problems that may result from this tension. We discuss how these problems may kept at bay by credible managerial commitments and other mechanisms. The framework is then applied to an analysis of the governance choice between traditional hierarchies and new organizational forms, specifically internal hybrids. Thus, the framework adds to the understanding of the costs and benefits of alternative organizational forms.