Working Paper: CEPR ID: DP10395
Authors: Luis Garicano; Luis Rayo
Abstract: Organizations fail due to incentive problems (agents do not want to act in the organization's interests) and bounded rationality problems (agents do not have the necessary information to do so). This survey uses recent advances in organizational economics to illuminate organizational failures along these two dimensions. We combine reviews of the literature with simple models and case discussions. Specifically, we consider failures related to the allocation of authority and short-termism, both of which are instances of 'multitasking problems'; communication failures in the presence of both soft and hard information due to incentive misalignments; resistance to change due to vested interests and rigid cultures; and failures related to the allocation of talent and miscommunication due to bounded rationality. We find that the organizational economics literature provides parsimonious explanations for a large range of economically significant failures.
Keywords: organizational economics
JEL Codes: D21; D86; J33; L23; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| incentive problems (D82) | organizational failures (L29) |
| bounded rationality (D01) | organizational failures (L29) |
| decentralized authority (H77) | coordination failures (P11) |
| flawed allocation of authority (H77) | organizational-wide failures (L29) |
| short-term incentives (M52) | prioritization of immediate rewards (D91) |
| prioritization of immediate rewards (D91) | long-term organizational health (L21) |
| communication failures (L96) | poor decision-making (D91) |
| withholding soft information (D82) | communication failures (L96) |
| miscommunication (Y70) | exacerbation of initial incentive problems (D82) |