Formal and Real Authority in Organizations

Abstract

This paper develops a theory of the allocation of formal and real authority within organizations. Real authority is determined by the structure of information, which in turn depends on the allocation of formal authority. An increase in an agent's real authority promotes initiative but results in a loss of control for the principal. The paper analyzes the allocation of formal authority as well as some determinants of the subordinates' real authority: overload, lenient rules, urgency of decision, reputation, performance measurement, and multiplicity of superiors. Finally, the amount of communication in an organization is shown to depend on the allocation of formal authority.

JEL Classification: D83, D23, D21