Incentives, Routines and Self-Command

What is the source of the value added by organization? Two leading explanations are coordination of specialized efforts and control of opportunistic behaviour. Both explanations assume that humans are boundedly rational — unable to process large amounts of information, to foresee all possible events, or to ferret out the facts known by others. In addition, control-of-opportunism theories (which have been dominant of late) assume that individuals are self-seeking and often dishonest. In models assuming opportunism, boundedness is invoked to establish the regime of action; within that regime, individuals behave coolly and strategically up to the limits of their ability, making no systematic errors. In these models, incentives, monitoring, and control procedures are seen as reducing the externality problems among individuals caused by cheating and shirking. In coordination models, organizational procedures are explained as necessary to reduce the probability that cooperating individuals will accidentally interfere with one another, leave vital tasks undone because they each expect someone else to perform them, or ignore information relevant to decisions. Both classes of explanation focus on the problems caused by the need for effective cooperation.