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Organisation Theory (Subject) / New institutional economics (Lesson)
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- Disciplinary origina Economics, Law
- Intellectual roots Interdisciplinary enterprise combining economics, law, organization theory, political science, sociology and anthropology to understand the institutions of social, political and commercial life
- research questions What are institutions How do they arise? How do they change and how -if at all- should the be reformed What purpose do they serve?
- Underlying assumptions Information is asymmetrical distributed Bounded rationality of transaction partners Transaction partners act opportunistically
- Bounded rationality Actors strive for rational decisions only limited information processing capacity actors thus use heuristics
- Opportunism Transaction partners act strategically seek to maximize own benefit and interest might even try to use deception to gain advantage
- Institutions Rules of the (socia) game socially constructed constraints that structure human interaction create order and decrease uncertainty in human interaction and economic exchange Types of constraints can be formal (laws, contracts etc.) and informal (norms of behavior etc. Might possess enforcement characteristics (sanctioning)
- Market failures and imperfections Lack of information Transaction costs Economies of scale Externalities
- Transactions and TAC Transactions A transaction occurs when a good or service is transferred across a technologically seperable interface TACs Costs of running the price mechanism (Coase) Costs of running the economic system (Arrow) Economic equivalent of friction in physical systems
- External Transaction costs Ex-ante Search and information costs Bargaining costs Ex-post Monitoring Costs Enforcement Costs Adjustment Costs
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- Internal TACs Costs of Structuring Costs of construction, maintenance and modification of an organizational structure (administration, it etc.) Costs of Operating Information Costs ((monitoring staff, performance appraisal etc.) Costs of physical transfer of goods (transport costs, setup costs etc.)
- Agency theory Information asymmetry (Agent better informed than Principal) Diverging utility functions (different goals) Need to align the angent's interests with those of the principal (shareholder)
- Detrimental effects of information asymmetries Hidden information Ex-ante information asymmetry: agent possesses private information regarding personal characteristics which cannot be assessed by principal Adverse Selection: Signaling and Screening as solution Hidden action Ex-post information asymmetry: principal cannot observe the agent's actions and is unable to assess if outcomes are determined by the agent's effort Moral Hazard: Contracting and Monitoring
- Why do firms exist? Firms exist due to the presence of Transaction Costs and try to internalize external TACs
- Explain Hold-up Problem Transaction specific investment Economic dependence of supplier who build warehouse close to buyer Opportunistic behavior Buyer can reduce the rent of supplier by max. Q-P Hold up Supplier avoids transaction specific investment - need for backward vertical integration of buyer
- Determinants of external TACs Specificity (+) Frequency (-) Complexity (+) Connectedness (+) Difficulty of Measuring (+)
- Solutions to moral Hazard Contracting Outcome-based contracts reduce risk of moral hazard affected by Goals (+), risk aversion of principal (+) outcome measurability (+) outcome uncertainty (-) risk aversion of agent (-) task-programmability (-) Monitoring increased with formal independence of oversight body