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Incentives, Information, and Organizational Design

  • Joseph E. Stiglitz

This paper explores the interaction between incentives, information, and organizational design. It argues that the virtues of the market economy do not lie so much in the vision of competition and decentralization embodied in the Arrow-Debreu model, or the Lange-Lerner-Taylor analysis of market socialism, as they do in those more recent models analyzing competition as contests (Nalebuff-Stiglitz, Lazear-Rosen) and decentralization as a structure of decision making, in environments in which imperfect information is dispersed among numerous individuals (humans are fallible) and accordingly, some method of aggregation has to be found. While the traditional model exaggerates the virtues of the market (whenever markets are incomplete and information is imperfect, market allocations are almost never constrained Pareto efficient), it also understates its virtues: its ability to solve the problems of selection, incentives, and information gathering and aggregation which are the care problems in organizational design. The paper shows how this alternative perspective provides insights into the role that time plays in resource allocation- -for example, patent (R & D) races as well races to be the first to enter a market. We are able to provide an explanation, for instance, for why in times of economic crisis (such as wars) most economies abandon reliance on market mechanisms.

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File URL: http://www.nber.org/papers/w2979.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2979.

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Date of creation: May 1989
Date of revision:
Publication status: published as Empirica, Vol. 16, No. 1, pp. 3-29, (1989).
Handle: RePEc:nbr:nberwo:2979
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. repec:fth:harver:1419 is not listed on IDEAS
  2. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  3. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-71, May.
  4. 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.
  5. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
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