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A Behavioral Model of Cost Reduction

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  • Roy Radner

Abstract

Three aspects of bounded rationality seem important for decision theory: (1) the existence of goals, (2) the search for improvement, and (3) long-run success. Two important criteria of long-run success are (a) the probability of survival, and (b) the long-run average rate of growth of performance (relative to one or more goals). One obstacle to the development of mathematical theories of resource allocation based on bounded rationality has been the absence of a clear and precise formulation of what is meant by "satisficing." In this paper I develop a few related mathematical models of satisficing in an uncertain environment, and apply them to the analysis of cost-reduction and technical change. An additional theme is that the allocation of resources in an organization is significantly influenced by the allocation of decision-making effort.

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  • Roy Radner, 1975. "A Behavioral Model of Cost Reduction," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 196-215, Spring.
    • Handle: RePEc:rje:bellje:v:6:y:1975:i:spring:p:196-215
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    Cited by:

    1. Zi-Lin He & Poh-Kam Wong, 2004. "Exploration vs. Exploitation: An Empirical Test of the Ambidexterity Hypothesis," Organization Science, INFORMS, vol. 15(4), pages 481-494, August.
    2. Güth, Werner & Vittoria Levati, M. & Ploner, Matteo, 2010. "Satisficing in strategic environments: A theoretical approach and experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(5), pages 554-561, October.
    3. Siegfried Berninghaus & Werner Güth & M. Vittoria Levati & Jianying Qiu, 2006. "Satisficing in sales competition: experimental evidence," Papers on Strategic Interaction 2006-32, Max Planck Institute of Economics, Strategic Interaction Group.
    4. Yang, Bijou & Lester, David, 1995. "New directions for economics," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 24(3), pages 433-446.
    5. Hsu, Chia-Wen & Lien, Yung-Chih & Chen, Homin, 2013. "International ambidexterity and firm performance in small emerging economies," Journal of World Business, Elsevier, vol. 48(1), pages 58-67.
    6. Zhi Tang & Jintong Tang, 2012. "Entrepreneurial orientation and SME performance in China’s changing environment: The moderating effects of strategies," Asia Pacific Journal of Management, Springer, vol. 29(2), pages 409-431, June.
    7. Glazer, Amihai, 2001. "Regulatory tune-ups," Information Economics and Policy, Elsevier, vol. 13(4), pages 427-438, December.
    8. Bruton HJ., 1979. "On the production of appropriate technology," ILO Working Papers 991822923402676, International Labour Organization.
    9. Sridhar Seshadri & Zur Shapira, 2001. "Managerial Allocation of Time and Effort: The Effects of Interruptions," Management Science, INFORMS, vol. 47(5), pages 647-662, May.
    10. Andreas Reinstaller & Werner Hölzl, 2001. "The creative response in economic development: the case of information processing technologies in US manufacturing, 1870-1930," Working Papers geewp15, Vienna University of Economics and Business Research Group: Growth and Employment in Europe: Sustainability and Competitiveness.
    11. Wayne Gray & John T. Scholz, 1989. "A Behavioral Approach to Compliance: OSHA Enforcement's Impact on Workplace Accidents," NBER Working Papers 2813, National Bureau of Economic Research, Inc.
    12. Onesun Steve Yoo & Charles J. Corbett & Guillaume Roels, 2016. "Optimal Time Allocation for Process Improvement for Growth-Focused Entrepreneurs," Manufacturing & Service Operations Management, INFORMS, vol. 18(3), pages 361-375, July.
    13. Reinstaller, Andreas & Holzl, Werner, 2001. "The Technological Bias in the Establishment of a Technological Regime: the adoption and enforcement of early information processing technologies in US manufacturing, 1870-1930," Research Memorandum 013, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
    14. Stephen J. Mezias & Mary Ann Glynn, 1993. "The three faces of corporate renewal: Institution, revolution, and evolution," Strategic Management Journal, Wiley Blackwell, vol. 14(2), pages 77-101, February.
    15. Kim B. Clark, 1979. "Unionization, Management Adjustment and Productivity," NBER Working Papers 0332, National Bureau of Economic Research, Inc.
    16. Butos William Ν. & Koppl Roger, 1999. "Hayek And Kirzner At The Keynesian Beauty Contest," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 9(2-3), pages 1-20, June.
    17. Hirshleifer, David & Lim, Sonya S. & Teoh, Siew Hong, 2004. "Disclosure to a Credulous Audience: The Role of Limited Attention," MPRA Paper 5198, University Library of Munich, Germany.

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