Informal authority in organizations

We assert that decision rights in organizations are not contractible:the boss can always overturn a subordinate's decision, so formalauthority resides only at the top. Although decision rightscannot be formally delegated, they might be informally delegatedthrough self-enforcing relational contracts. We examine thefeasibility of informal authority in two informational environments.We show that different information structures produce differentdecisions not only because different information is broughtto bear in the decision-making process, but also because differentinformation creates different temptations to renege on relationalcontracts. In addition, we explore the implications of formaldelegation achieved through divestitures.