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American Economic Review: Vol. 100 No. 1 (March 2010)

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Interpersonal Authority in a Theory of the Firm

Article Citation

Van den Steen, Eric. 2010. "Interpersonal Authority in a Theory of the Firm." American Economic Review, 100(1): 466-90.

DOI: 10.1257/aer.100.1.466

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 D23, L20)

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Appendix (125.79 KB)

Authors

Van den Steen, Eric (Harvard U)

JEL Classifications

D23: Organizational Behavior; Transaction Costs; Property Rights
L20: Firm Objectives, Organization, and Behavior: General


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