This paper develops a theory of the separation between formal authority (the right to decide) and real authority (the effective control over decisions), and illustrates how a formally integrated structure can accommodate various degrees of "real" integration. Real authority is determined by the structure of information, which in turn depends on the allocation of formal authority. An increase is an agent's real authority promotes initiatives but results in a loss of control for the principal.
After showing that firm boundaries and information structures are intertwined, the paper examines a number of factors that encourages the subordinates' real authority in an integrated structure: overload, lenient rules, urgency of decision, reputation, performance measurement, and multiplicity of superiors.
Lastly, the amount of communication in an organization is shown to depend on the allocation of formal authority.