A Theory of Authority

Within organizations, there are typically limits to leaders’ authority. This paper explores how organizations are structured in the face of such constraints. Many organizational phenomena can be understood as due to leaders’ desire to bolster the “legitimacy” of their authority. Examples include: above-market-clearing wages, merger decisions, bureaucratic organization, and rejection of overqualified workers. The concept of legitimacy is formalized in the context of a single-agent moral-hazard model. In the model, legitimacy is described as the limit to the orders workers feel they have a duty to carry out. The model develops the concept of an authority maintenance (AM) constraint.