The Optimality of Power in Organizations: Power Acquisition Process and Evaluation∗

This paper develops a moral hazard model whereby an agent exerts power to impute failure to other agents. The model is used to analyze the effect of power on organizational welfare. Our conclusion is that power is beneficial for organizations if the principal can control the power rela-tionships between agents. These benefits disappear if strategic interaction between agents determines the power relationship. Other kinds of bene-fits are also shown by extending the model in two directions: (i) where there is competition for power between agents, and (ii) where the strategic interaction between agents generates a direct negative externality for the organization.