The Modern Firm, Corporate Governance and Investment
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The Modern Firm, Corporate Governance and Investment

Edited by Per-Olof Bjuggren and Dennis C. Mueller

This book explores the revolutionary development of the theory of the firm over the past 35 years. Despite rapid progress in the field, new developments in the microeconomic and industrial organization literature have been relatively scant. This book attempts to redress the balance by providing a comprehensive overview of the theory of the firm before moving on to examine firms and the organization of their economic activities. The contributors also investigate the impact of ownership structure and board composition on firm performance and study how the institutional framework of an economy affects investment decisions.
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Chapter 5: The Use of Managerial Authority in the Knowledge Economy

Kirsten Foss


Kirsten Foss INTRODUCTION 1. This chapter contributes to the ongoing debate in diverse literatures, including management, sociology and economics, on the issue of the use of authority. The debate has re-surfaced with the focus on the emerging knowledge economy. In that debate a number of management academics and sociologists have argued that authority relations will strongly diminish in importance or at least change significantly in character.1 More specifically, these writers have argued that the exercise of authority is, if not outright impossible, at least not efficient and will be substituted by different means of organizing the production of knowledge intensive goods and services. More discretion will be granted to knowledge workers and this will result in an eruption of the hierarchical structures of organizations. Such predictions are a serious concern for those theories, notably transaction cost theories (Coase, 1937; Williamson, 1985) and property rights theory (Hart and Moore, 1990; Hart, 1995, 1996), that place emphasis on authority relations as the mode of coordination that primarily characterizes firms. Thus, explanations of the existence and boundaries of firms that rely on authority are challenged. Part of the reason behind the prediction of the decline of the importance of authority relations is the assertion that firms will experience a tension between the exercise of authority by superiors based on their position in the hierarchy and the exercise of authority by knowledge workers based on their great expertise in certain areas. As superiors come to lack information about the tasks that are carried out...

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