Wells, Robin: Information, Authority and Internal Governance of the Firm
World Conference Econometric Society, 2000, Seattle

Robin Wells, Massachusetts Institute of Technology
Information, Authority and Internal Governance of the Firm
Session: C-7-1  Sunday 13 August 2000  by Wells, Robin
I develop a theory of optimal governance of intra-organizational transactions under hidden gaming. In a "structure-less", multi-product, multi-agent organization agents are allowed free communication and coalition-formation under private information. A "critical agent" holds the outside or de jure principal to zero surplus by threat of witholding information on allocative efficiency and via personal discretion over allocation of his own labor services. He emerges as the de facto principal of the organization, setting the "organizational rules of the game" in equilibrium but imposes no efficiency loss. A solution for the outside prnicipal is to impose an efficiency-diminishing incomplete-contract mechanism, an authority structure that ignores efficiency-enhancing messages from agents. This improves the principal's surplus extraction but at the cost of allocative efficiency of the organization. Authority is shown to function like "intra-organizational property rights" in assigning exclusive, tradeable shares of the critical agent's labor services to authority-holders. The employment relationship is linked to elimination of personal discretion over own intra-organizational labor allocation.

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