Power Dynamics in Organizations

We explore the evolution of power within organizations. To this end, we examine an infinitely repeated game in which a principal can empower an agent by letting him choose a project. The principal, however, does not know what projects are available to the agent. We characterize the optimal relational contract and explore its implications. Our results speak to how power is earned, lost, and retained. They show that entrenched power structures are consistent with managers who are managing power optimally. And they provide a new perspective on two long-standing issues in organizational economics.