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POL 601: Public Management

October 5: Economic Theories of Organizations

​​​​​​Chat GPT: The economics of organization is a field that studies how economic actors use different means to coordinate their activities within and between organizations, such as firms, alliances, institutions, and markets. Some of the most important ideas found in this field are:

Agency theory: This idea examines the problems that arise when one party (the principal) delegates decision-making authority to another party (the agent) who may have different interests or goals. For example, how can shareholders ensure that managers act in their best interests? How can managers motivate employees to perform well? Agency theory analyzes the design of contracts, incentives, monitoring, and governance mechanisms to align the interests of principals and agents. Transaction cost economics: This idea focuses on the costs of organizing economic activities, such as searching for information, negotiating agreements, enforcing contracts, and adapting to changing circumstances. For example, why do some firms choose to produce their own inputs rather than buy them from the market? Why do some firms outsource some of their functions to other firms? Transaction cost economics explains how firms choose their organizational boundaries and structures based on minimizing transaction costs.

Property rights theory: This idea studies how the allocation of decision rights and residual claims affects the behavior and performance of economic actors. For example, how does ownership affect the incentives to invest in specific assets? How does the division of authority affect the coordination of decisions within a firm? Property rights theory analyzes how different contractual arrangements, such as ownership, franchising, licensing, or joint ventures, affect the incentives and outcomes of economic transactions.

These are some of the main ideas that organizational economists use to understand and improve the design and performance of organizations.

Application to Public Policy and Administration