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Organizations and Markets

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  • Herbert A. Simon

Abstract

The economies of modern industrialized society can more appropriately be labeled organizational economies than market economies. Thus, even market-driven capitalist economies need a theory of organizations as much as they need a theory of markets. The attempts of the new institutional economics to explain organizational behavior solely in terms of agency, asymmetric information, transaction costs, opportunism, and other concepts drawn from neoclassical economics ignore key organizational mechanisms like authority, identification, and coordination, and hence are seriously incomplete. The theory presented here is simple and coherent, resting on only a few mechanisms that are causally linked. Better yet, it agrees with empirical observations of organizational phenomena. Large organizations, especially governmental ones, are often caricatured as "bureaucracies," but they are often highly effective systems, despite the fact that the profit motive can penetrate these vast structures only by indirect means.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.2.25
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 5 (1991)
Issue (Month): 2 (Spring)
Pages: 25-44

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Handle: RePEc:aea:jecper:v:5:y:1991:i:2:p:25-44

Note: DOI: 10.1257/jep.5.2.25
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  1. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  2. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  3. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
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