SIMON (1991):
ORGANIZATIONS AND
MARKETS
ECB1IEBE
JJ
,TABLE OF CONTENTS
Theme 8: Simon (1991): Organizations and markets .............................................................................................. 2
Ubiquity of organizations. New institutional economist: ignore key organizational mechanisms ...................... 2
Motivation and efficiency in organizations: three questions ............................................................................... 2
Authority: the employment relation .................................................................................................................... 3
Rewards as motivation ........................................................................................................................................ 3
Loyalty: Identification with organizational goals ................................................................................................ 3
Coordination........................................................................................................................................................ 4
2
, THEME 8: SIMON (1991): ORGANIZATIONS AND MARKETS
• Most actors in modern economy are employees
• Why are there firms? Why are not all actors independent contractors?
• How are employees motivated to work for maximization of firm’s profit?
• Neoclassical answer: Employment contract: workers maximize utility by accepting
authority of firm: accept orders from profit maximisers in charge
• Questions about scope activity and operation of firms → The new institutional economics →
tries explaining when activities are carried out through (1) market or (2) skins of firm; also
how it is possible for firms to operate efficiently
• Major roles in explanation of New Institutional economics
• Transaction costs
• Opportunism
• Sometimes emerged in ‘information asymmetry’ / ‘incomplete information’ OR
Agency theory (treats employment contract = optimal contract between principal and
agents) and how contract can deal with shirking and other motivational problems
• Contract influenced by parties’ access to information; cost of negotiating;
opportunities for cheating. Introduces bounded rationality in behaviour
• Fundamental feature: centrality of markets and exchanges: all phenomena be explained by
translating/deriving them from market transactions based upon negotiated contracts
• New institutional economics: compatible with conservative of neoclassic theory BUT does much to
auxiliary exogenous assumptions that are needed for theories to work.
• Since such constructs are typically introduced into the analysis in a casual way, with no
empirical support except an appeal to introspection and common sense, mechanisms of these
sorts have proliferated in the literature, giving it a very ad hoc flavour.
UBIQUITY OF ORGANIZATIONS. NEW INSTITUTIONAL ECONOMIST: IGNORE KEY
ORGANIZATIONAL MECHANISMS
• Organizations = dominant feature of world → instead of market economy, better be called
organizational economy
• IF the economy were to be viewed as an organizational economy, the prominent features were
to be:
• Producers are employees of the firm, not owners: they have no reason to maximize
profits of firms, except to the extent they can be controlled by the owner
• System = nearly neutral equilibrium between use of market transactions and authority
relations to handle any particular matter
• In sum: Poses the question of why larger part of modern economy’s business is done by
organizations; what role markets play in connecting organizations with each other, and market
with consumer.
• What mechanism maintains the highly fluid equilibrium between them?
MOTIVATION AND EFFICIENCY IN ORGANIZATIONS: THREE QUESTIONS
3
ORGANIZATIONS AND
MARKETS
ECB1IEBE
JJ
,TABLE OF CONTENTS
Theme 8: Simon (1991): Organizations and markets .............................................................................................. 2
Ubiquity of organizations. New institutional economist: ignore key organizational mechanisms ...................... 2
Motivation and efficiency in organizations: three questions ............................................................................... 2
Authority: the employment relation .................................................................................................................... 3
Rewards as motivation ........................................................................................................................................ 3
Loyalty: Identification with organizational goals ................................................................................................ 3
Coordination........................................................................................................................................................ 4
2
, THEME 8: SIMON (1991): ORGANIZATIONS AND MARKETS
• Most actors in modern economy are employees
• Why are there firms? Why are not all actors independent contractors?
• How are employees motivated to work for maximization of firm’s profit?
• Neoclassical answer: Employment contract: workers maximize utility by accepting
authority of firm: accept orders from profit maximisers in charge
• Questions about scope activity and operation of firms → The new institutional economics →
tries explaining when activities are carried out through (1) market or (2) skins of firm; also
how it is possible for firms to operate efficiently
• Major roles in explanation of New Institutional economics
• Transaction costs
• Opportunism
• Sometimes emerged in ‘information asymmetry’ / ‘incomplete information’ OR
Agency theory (treats employment contract = optimal contract between principal and
agents) and how contract can deal with shirking and other motivational problems
• Contract influenced by parties’ access to information; cost of negotiating;
opportunities for cheating. Introduces bounded rationality in behaviour
• Fundamental feature: centrality of markets and exchanges: all phenomena be explained by
translating/deriving them from market transactions based upon negotiated contracts
• New institutional economics: compatible with conservative of neoclassic theory BUT does much to
auxiliary exogenous assumptions that are needed for theories to work.
• Since such constructs are typically introduced into the analysis in a casual way, with no
empirical support except an appeal to introspection and common sense, mechanisms of these
sorts have proliferated in the literature, giving it a very ad hoc flavour.
UBIQUITY OF ORGANIZATIONS. NEW INSTITUTIONAL ECONOMIST: IGNORE KEY
ORGANIZATIONAL MECHANISMS
• Organizations = dominant feature of world → instead of market economy, better be called
organizational economy
• IF the economy were to be viewed as an organizational economy, the prominent features were
to be:
• Producers are employees of the firm, not owners: they have no reason to maximize
profits of firms, except to the extent they can be controlled by the owner
• System = nearly neutral equilibrium between use of market transactions and authority
relations to handle any particular matter
• In sum: Poses the question of why larger part of modern economy’s business is done by
organizations; what role markets play in connecting organizations with each other, and market
with consumer.
• What mechanism maintains the highly fluid equilibrium between them?
MOTIVATION AND EFFICIENCY IN ORGANIZATIONS: THREE QUESTIONS
3
