reflection 111
tao
class3-econorgtheory.pptxEconomic Org Theories
Designing Effective Organizations
BUAD 422
Nathan A. Bragaw, PhD
1
Administrivia
Reflection 1 grades should be posted by Thursday
2
“Rationality”
Selecting the outcome that delivers maximum utility to the decision maker
Access to all available information
All potential outcomes are known
Utility of each outcome can be assessed
3
NeoClassical Economics
Firm as a production function
Acquire inputs (labor, technology, etc.)
Convert to outputs
Sell to buyers
Assumptions
Perfect & complete information
Efficient markets
Resource mobility
Role of Management
Identify marginal costs &
marginal opportunities
4
Agency Theory
Firm as a nexus of contracts
Involve principles and agents
Principles contract with agents for production
Contracting has costs that must be monitored
Assumptions
Incomplete & asymmetric information
Differing risk preferences
Agents are “Self-interested” (goal misalignment)
“Efficient” contracts align agents’ interests to Principles’ interests
5
Agency Theory (cont.)
Adverse Selection
Hidden information
Principle does not know the true intentions/abilities of Agent until after engaging them as the agent
Moral Hazard
Hidden action
Agent can take risks Principle would deem unacceptable because the agent is shielded from consequence of that risk
Common solution
Contract Terms
Compensation (i.e., stock) as alignment mechanism
6
Transaction Costs Theory
Firm size a function of “make” vs. “buy”
Transaction costs are costs above & beyond those required to create a product
Transaction costs increase when value is difficult to determine, or exchange partner is untrustworthy
Assumptions
Actors are boundedly rational
Actors are opportunistic with guile
7
If transaction costs > coordinating costs internalize
If coordinating costs > transaction costs contract
Transaction costs
Search
Negotiating & contracting
Monitoring
Arbitration/Litigation
Coordinating costs
Multiple planning systems
Unique R&Cs at unit level
Increased control systems
Additional overhead
Transaction Cost Theory (cont.)
8
Economic Org Theories
Reductionist view
Organizations are just collections of individuals
People are selfish
People are untrustworthy
Money is both the issue and the solution
9
Key Takeaways from Class
Economic theories reduce organizations to generic individuals
People are selfish & untrustworthy
Management is reduced to cost control
Today’s source material:
Vibert, C. (2004) Theories of Macro Organizational Behavior. Armonk, NY: M.E. Sharpe.
Miles, J.A. (2012) Management and Organization Theory. San Francisco, CA: John Wiley & Sons, Inc.
10
For Next Class
Rational Org Theories
11
