Your PDF has successfully downloaded.

You may be interested in finding more content on these topics:


You are not currently logged in.

Access JSTOR through your library or other institution:


Log in through your institution.

Formal and Real Authority in Organizations

Philippe Aghion and Jean Tirole
Journal of Political Economy
Vol. 105, No. 1 (Feb., 1997), pp. 1-29
Stable URL:
Page Count: 29
  • Download PDF
  • Add to My Lists
  • Cite this Item
We're having trouble loading this content. Download PDF instead.


This paper develops a theory of the allocation of formal authority (the right to decide) and real authority (the effective control over decisions) within organizations, and it illustrates how a formally integrated structure can accommodate various degrees of "real" integration. 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. After spelling out (some of) the main determinants of the delegation of formal authority within organizations, the paper examines a number of factors that increase the subordinates' real authority in a formally integrated structure: 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.

Notes and References

This item contains 33 references.

  • 1
    This reference contains 2 citations:
    • Simon 1951, p. 294
    • Jennergren (1981)
  • 4
    This reference contains 4 citations:
    • De Bijl 1994
    • 1995
    • Rotemberg 1993
    • 1994
  • 6
    Chandler (1962)
  • 13
    This reference contains 2 citations:
    • Williamson [1975
    • 1985
  • 14
    Jennergren (1981)
  • 16
    Jennergren 1981
  • 27
    Ringleb and Wiggins 1990
  • Aghion, Philippe, and Tirole,Jean. "Formal and Real Authority in Organi- zations." Discussion Paper no. 37. Toulouse: Inst. d'Economie Indus- trielle, 1994.
  • —. "Some Implications of Growth for Organizational Form and Own- ership Structure." European Econ. Rev.39 (April1995): 440-55.
  • Arrow, KennethJ. "Vertical Integration and Communication." Bell J. Econ. 6 (Spring1975): 173-83.
  • Burkart, Mike; Gromb, Denis; and Panunzi, Fausto. "Large Shareholders, Monitoring and Fiduciary Duty." Manuscript. London: London School Econ.; Cambridge: Massachusetts Inst. Tech., 1994.
  • Chandler, Alfred Dupont. Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge, Mass.: MIT Press, 1962.
  • Crémer, Jacques. "Arm's Length Relationships." Q.E.110 (May1995): 275-95.
  • Davis, Stanley M., and Lawrence, Paul R. Matrix. Reading, Mass.: Addison- Wesley, 1977.
  • De Bijl, P. "Delegation of Responsibility in Organizations." Manuscript. Tilburg: Tilburg Univ., 1994.
  • —. "Strategic Delegation of Responsibility in Competing Firms." Manuscript. Tilburg: Tilburg Univ., 1995.
  • "Executive Roundtable on Corporate Strategy in the '90s." Continental Bank. J. Appl. Corporate Finance, no. 6 (1993), pp. 42-60.
  • Grossman, SanfordJ., and Hart, Oliver D. "The Costs and Benefits of Own- ership: A Theory of Vertical and Lateral Integration." J.P.E.94 (August 1986): 691-719.
  • Hart, Oliver D., and Moore,John. "Property Rights and the Nature of the Firm." J.P.E.98 (December1990): 1119-58.
  • Jennergren, L. Peter. "Decentralization in Organizations." In Handbook of Organizational Design, vol. 2, Remodeling Organizations and Their Environ- ments, edited by Paul C. Nystrom and William H. Starbuck. Oxford: Ox- ford Univ. Press, 1981.
  • Ringleb, Al H., and Wiggins, Steven N. "Liability and Large-Scale, Long- Term Hazards." J.P.E.98 (June1990): 574-95.
  • Riordan, Michael H. "What Is Vertical Integration? " In The Firm as a Nexus of Treaties, edited by Masahiko Aoki, Bo Gustafsson, and Oliver E. William- son. London: Sage, 1990.
  • Rodriguez, Diego, and Vayanos, Dimitri. "Decentralization and the Man- agement of Competition." Manuscript. Cambridge: Massachusetts Inst. Tech., 1993.
  • Rotemberg, Julio. "Power in Profit Maximizing Organizations." Manu- script. Cambridge: Massachusetts Inst. Tech., 1993.
  • —. "Formal Authority vs. Power in Profit Maximizing Organizations." Manuscript. Cambridge: Massachusetts Inst. Tech., 1994.
  • Schmidt, Klaus. "The Costs and Benefits of Privatization." Manuscript. Bonn: Univ. Bonn, 1991.
  • Shavell, Steven. Economic Analysis of Accident Law. Cambridge, Mass.: Har- vard Univ. Press, 1987.
  • Simon, Herbert A. "A Formal Theory of the Employment Relationship." Econometrica19 (July1951): 293-305.
  • Strasser, Kurt A., and Rodosevich, Denise. "Seeing the Forest for the Trees in CERCLA Liability." Yale J. Regulation10 (Summer1993): 493-560.
  • Tirole,Jean. "Incomplete Contracts: Where Do We Stand?" Walras-Bowley lecture presented at the North American summer meetings of the Econo- metric Society, Quebec, 1994.
  • Weber, Max. Economy and Society: An Outline of Interpretive Sociology. New York: Bedminster Press, 1968.
  • Williamson, Oliver E. Markets and Hierarchies: Analysis and Antitrust Implica- tions. New York: Free Press, 1975.
  • —.The Economic Institutions of Capitalism: Firms, Markets, Relational Con- tracting. New York: Free Press, 1985.