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The Problem With Bounded Rationality On Behavioral Assumptions in the Theory of the Firm

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  • Nicolai J. Foss

Abstract

I discuss and compare alternative approaches to integrating bounded rationality with the theory of economic organization, concentrating on the organizational capabilities approach, which is strongly influenced by the works of Nelson and Winter, organizational economics, particularly transaction cost economics, and, finally, a small subset of the literature on biases to judgment and cognition. I argue that, contrary to the conventional view, both the organizational capabilities approach and transaction cost economics treat bounded rationality rather “thinly,” the former being in actuality more taken up with organizational routines than individual boundedly rational behavior, the latter only invoking bounded rationality to the extent that it helps explaining incompleteness of contracting. The rich literature on cognitive biases, etc. suggests a “thick” approach to bounded rationality that may be helpful with respect to furthering the theory of economic organization. Examples pertaining to the internal organization of firms are provided.

Suggested Citation

  • Nicolai J. Foss, 2001. "The Problem With Bounded Rationality On Behavioral Assumptions in the Theory of the Firm," DRUID Working Papers 01-15, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  • Handle: RePEc:aal:abbswp:01-15
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    File URL: http://www3.druid.dk/wp/20010015.pdf
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    References listed on IDEAS

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    1. Nicolai J. Foss, 1996. "Firms, Incomplete Contracts and Organizational Learning," DRUID Working Papers 96-2, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    2. Peter Maskell, 1996. "Localised Low-tech Learning in the Furniture Industry," DRUID Working Papers 96-11, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
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    Cited by:

    1. Dequech, David, 2006. "The new institutional economics and the theory of behaviour under uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 59(1), pages 109-131, January.

    More about this item

    Keywords

    capability; organizations; transaction costs;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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