Decentralized Information Processing in the Theory of Organizations

Although models with bounded rationality — defined broadly to mean those in which agent behaviour departs from the paradigm of effortless full rationality — are appearing in every field of economics, only in the theory of organizations has bounded rationality been an important theme throughout the history of the field. There is a reason for this difference. The classical model of rational choice has been a good approximation and powerful tool in studying consumer and producer theory, markets and price determination, imperfect competition, trading in financial markets, and most other topics in economics. Only recently have fields matured enough that some outstanding open questions require more accurate models of human decision-making. In the thoery of organizations, on the other hand, the rational model leads to uninteresting models of organizations, in which one manager or entrepreneur can run a firm or economy of arbitrary size. Without bounds on information processing capacity, it is impossible to explain the sharing of information processing tasks that is such an important part of the interaction between members of organizations, and to explain the existence and functioning of the administrative apparatus that are such important components of organizations (as documented for example by Chandler, 1966 and 1990).