Abstract
A recent economic literature analyzes institutions, such as firms, in terms of incomplete contracts and property rights. The paper begins by briefly summarizing this literature. The paper goes on to argue that the incomplete-contracting approach can elucidate the meaning of authority. The paper takes the point of view that someone has authority in an economic relationship because they control some non-human assets in the relationship, rather than because they control people directly. The advantage of such an approach is that it avoids a thorny question that arises when authority is defined with respect to human assets: what ensures that, if A has authority over B, B does what A wants? The paper also argues that authority may have little to do with communication: an employer may have authority over an employee even though the employer may act on information provided by the employee.