diff --git a/CHANGELOG.md b/CHANGELOG.md
index afb1a8325..d420a8931 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -39,6 +39,7 @@ Ref: https://keepachangelog.com/en/1.0.0/
 
 ### Features
 
+* [\#10703](https://github.com/cosmos/cosmos-sdk/pull/10703) Create a new grantee account, if the grantee of an authorization does not exist.
 * [\#10592](https://github.com/cosmos/cosmos-sdk/pull/10592) Add a `DecApproxEq` function that checks to see if `|d1 - d2| < tol` for some Dec `d1, d2, tol`.
 * [\#10393](https://github.com/cosmos/cosmos-sdk/pull/10393) Add `HasSupply` method to bank keeper to ensure that input denom actually exists on chain.
 * [\#9933](https://github.com/cosmos/cosmos-sdk/pull/9933) Introduces the notion of a Cosmos "Scalar" type, which would just be simple aliases that give human-understandable meaning to the underlying type, both in Go code and in Proto definitions.
diff --git a/simapp/app.go b/simapp/app.go
index 51306e498..0e30f90ea 100644
--- a/simapp/app.go
+++ b/simapp/app.go
@@ -285,7 +285,7 @@ func NewSimApp(
 		stakingtypes.NewMultiStakingHooks(app.DistrKeeper.Hooks(), app.SlashingKeeper.Hooks()),
 	)
 
-	app.AuthzKeeper = authzkeeper.NewKeeper(keys[authzkeeper.StoreKey], appCodec, app.msgSvcRouter)
+	app.AuthzKeeper = authzkeeper.NewKeeper(keys[authzkeeper.StoreKey], appCodec, app.msgSvcRouter, app.AccountKeeper)
 
 	// register the proposal types
 	govRouter := govtypes.NewRouter()
diff --git a/x/authz/client/testutil/grpc.go b/x/authz/client/testutil/grpc.go
index 8f5d6a429..699dc005d 100644
--- a/x/authz/client/testutil/grpc.go
+++ b/x/authz/client/testutil/grpc.go
@@ -193,14 +193,14 @@ func (s *IntegrationTestSuite) TestQueryGranterGrantsGRPC() {
 			fmt.Sprintf("%s/cosmos/authz/v1beta1/grants/%s", val.APIAddress, val.Address.String()),
 			false,
 			"",
-			6,
+			7,
 		},
 		{
-			"valid query: expect two grants",
+			"valid query: expect seven grants",
 			fmt.Sprintf("%s/cosmos/authz/v1beta1/grants/%s", val.APIAddress, val.Address.String()),
 			false,
 			"",
-			6,
+			7,
 		},
 	}
 	for _, tc := range testCases {
diff --git a/x/authz/client/testutil/query.go b/x/authz/client/testutil/query.go
index 1fdad077c..18355afaf 100644
--- a/x/authz/client/testutil/query.go
+++ b/x/authz/client/testutil/query.go
@@ -221,7 +221,7 @@ func (s *IntegrationTestSuite) TestQueryGranterGrants() {
 			},
 			false,
 			"",
-			6,
+			7,
 		},
 		{
 			"valid case with pagination",
diff --git a/x/authz/client/testutil/tx.go b/x/authz/client/testutil/tx.go
index dc4f1b00e..48fe9c04f 100644
--- a/x/authz/client/testutil/tx.go
+++ b/x/authz/client/testutil/tx.go
@@ -43,7 +43,7 @@ func (s *IntegrationTestSuite) SetupSuite() {
 	s.Require().NoError(err)
 
 	val := s.network.Validators[0]
-	s.grantee = make([]sdk.AccAddress, 2)
+	s.grantee = make([]sdk.AccAddress, 3)
 
 	// Send some funds to the new account.
 	// Create new account in the keyring.
@@ -79,6 +79,31 @@ func (s *IntegrationTestSuite) SetupSuite() {
 
 	_, err = s.network.WaitForHeight(1)
 	s.Require().NoError(err)
+
+	// Create new account in the keyring.
+	s.grantee[2] = s.createAccount("grantee3")
+
+	// grant send authorization to grantee3
+	out, err = ExecGrant(val, []string{
+		s.grantee[2].String(),
+		"send",
+		fmt.Sprintf("--%s=100steak", cli.FlagSpendLimit),
+		fmt.Sprintf("--%s=%s", flags.FlagFrom, val.Address.String()),
+		fmt.Sprintf("--%s=true", flags.FlagSkipConfirmation),
+		fmt.Sprintf("--%s=%s", flags.FlagBroadcastMode, flags.BroadcastBlock),
+		fmt.Sprintf("--%s=%s", flags.FlagFees, sdk.NewCoins(sdk.NewCoin(sdk.DefaultBondDenom, sdk.NewInt(10))).String()),
+		fmt.Sprintf("--%s=%d", cli.FlagExpiration, time.Now().Add(time.Minute*time.Duration(120)).Unix()),
+	})
+	s.Require().NoError(err)
+
+	err = s.network.WaitForNextBlock()
+	s.Require().NoError(err)
+
+	var response sdk.TxResponse
+	s.Require().NoError(val.ClientCtx.Codec.UnmarshalJSON(out.Bytes(), &response), out.String())
+	s.Require().Equal(int(response.Code), 0)
+	s.Require().NotEqual(int(response.Height), 0)
+
 }
 
 func (s *IntegrationTestSuite) createAccount(uid string) sdk.AccAddress {
@@ -631,6 +656,7 @@ func (s *IntegrationTestSuite) TestNewExecGenericAuthorized() {
 func (s *IntegrationTestSuite) TestNewExecGrantAuthorized() {
 	val := s.network.Validators[0]
 	grantee := s.grantee[0]
+	grantee1 := s.grantee[2]
 	twoHours := time.Now().Add(time.Minute * time.Duration(120)).Unix()
 
 	_, err := ExecGrant(
@@ -667,6 +693,7 @@ func (s *IntegrationTestSuite) TestNewExecGrantAuthorized() {
 		args         []string
 		expectedCode uint32
 		expectErr    bool
+		expectErrMsg string
 	}{
 		{
 			"valid txn",
@@ -679,6 +706,20 @@ func (s *IntegrationTestSuite) TestNewExecGrantAuthorized() {
 			},
 			0,
 			false,
+			"",
+		},
+		{
+			"error over grantee doesn't exist on chain",
+			[]string{
+				execMsg.Name(),
+				fmt.Sprintf("--%s=%s", flags.FlagFrom, grantee1.String()),
+				fmt.Sprintf("--%s=%s", flags.FlagBroadcastMode, flags.BroadcastSync),
+				fmt.Sprintf("--%s=%s", flags.FlagFees, sdk.NewCoins(sdk.NewCoin(s.cfg.BondDenom, sdk.NewInt(10))).String()),
+				fmt.Sprintf("--%s=true", flags.FlagSkipConfirmation),
+			},
+			0,
+			true,
+			"insufficient funds", // earlier the error was account not found here.
 		},
 		{
 			"error over spent",
@@ -691,6 +732,7 @@ func (s *IntegrationTestSuite) TestNewExecGrantAuthorized() {
 			},
 			4,
 			false,
+			"",
 		},
 	}
 
@@ -701,10 +743,13 @@ func (s *IntegrationTestSuite) TestNewExecGrantAuthorized() {
 			clientCtx := val.ClientCtx
 
 			out, err := clitestutil.ExecTestCLICmd(clientCtx, cmd, tc.args)
-			if tc.expectErr {
+			var response sdk.TxResponse
+			if tc.expectErrMsg != "" {
+				s.Require().NoError(clientCtx.Codec.UnmarshalJSON(out.Bytes(), &response), out.String())
+				s.Require().Contains(response.RawLog, tc.expectErrMsg)
+			} else if tc.expectErr {
 				s.Require().Error(err)
 			} else {
-				var response sdk.TxResponse
 				s.Require().NoError(err)
 				s.Require().NoError(clientCtx.Codec.UnmarshalJSON(out.Bytes(), &response), out.String())
 				s.Require().Equal(tc.expectedCode, response.Code, out.String())
diff --git a/x/authz/keeper/keeper.go b/x/authz/keeper/keeper.go
index 43c3ccc15..c3ca01fb6 100644
--- a/x/authz/keeper/keeper.go
+++ b/x/authz/keeper/keeper.go
@@ -13,22 +13,25 @@ import (
 	storetypes "github.com/cosmos/cosmos-sdk/store/types"
 	sdk "github.com/cosmos/cosmos-sdk/types"
 	sdkerrors "github.com/cosmos/cosmos-sdk/types/errors"
+	authkeeper "github.com/cosmos/cosmos-sdk/x/auth/keeper"
 	"github.com/cosmos/cosmos-sdk/x/auth/middleware"
 	"github.com/cosmos/cosmos-sdk/x/authz"
 )
 
 type Keeper struct {
-	storeKey storetypes.StoreKey
-	cdc      codec.BinaryCodec
-	router   *middleware.MsgServiceRouter
+	storeKey   storetypes.StoreKey
+	cdc        codec.BinaryCodec
+	router     *middleware.MsgServiceRouter
+	authKeeper authkeeper.AccountKeeper
 }
 
 // NewKeeper constructs a message authorization Keeper
-func NewKeeper(storeKey storetypes.StoreKey, cdc codec.BinaryCodec, router *middleware.MsgServiceRouter) Keeper {
+func NewKeeper(storeKey storetypes.StoreKey, cdc codec.BinaryCodec, router *middleware.MsgServiceRouter, ak authkeeper.AccountKeeper) Keeper {
 	return Keeper{
-		storeKey: storeKey,
-		cdc:      cdc,
-		router:   router,
+		storeKey:   storeKey,
+		cdc:        cdc,
+		router:     router,
+		authKeeper: ak,
 	}
 }
 
diff --git a/x/authz/keeper/msg_server.go b/x/authz/keeper/msg_server.go
index e13b29fbd..0f8aae3bc 100644
--- a/x/authz/keeper/msg_server.go
+++ b/x/authz/keeper/msg_server.go
@@ -17,6 +17,13 @@ func (k Keeper) Grant(goCtx context.Context, msg *authz.MsgGrant) (*authz.MsgGra
 	if err != nil {
 		return nil, err
 	}
+	// create the account if it is not in account state
+	granteeAcc := k.authKeeper.GetAccount(ctx, grantee)
+	if granteeAcc == nil {
+		granteeAcc = k.authKeeper.NewAccountWithAddress(ctx, grantee)
+		k.authKeeper.SetAccount(ctx, granteeAcc)
+	}
+
 	granter, err := sdk.AccAddressFromBech32(msg.Granter)
 	if err != nil {
 		return nil, err