ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 914
In most firms, if not all, workers are divided asymmetrically in terms of authority and responsibility. In this paper, we view the asymmetric allocations of authority and responsibility as essential features of hierarchy and examine why hierarchies often prevail in organizations from that perspective. A key departure is that we consider a case where the authority relationship is defined only by the allocation of responsibility via contingent contracts. Within this framework, we show that the contractual arrangement which allocates responsibility asymmetrically often emerges as the optimal organizational form, which gives rise to the chain of command pertaining to hierarchical organizations.
Authority Responsibility Contract Cheap-talk communication Information acquisition