Working Paper: NBER ID: w2979
Authors: Joseph E. Stiglitz
Abstract: This paper explores the interaction between incentives, information, and organizational design. It argues that the virtues of the market economy do not lie so much in the vision of competition and decentralization embodied in the Arrow-Debreu model, or the Lange-Lerner-Taylor analysis of market socialism, as they do in those more recent models analyzing competition as contests (Nalebuff-Stiglitz, Lazear-Rosen) and decentralization as a structure of decision making, in environments in which imperfect information is dispersed among numerous individuals (humans are fallible) and accordingly, some method of aggregation has to be found. While the traditional model exaggerates the virtues of the market (whenever markets are incomplete and information is imperfect, market allocations are almost never constrained Pareto efficient), it also understates its virtues: its ability to solve the problems of selection, incentives, and information gathering and aggregation which are the care problems in organizational design. The paper shows how this alternative perspective provides insights into the role that time plays in resource allocation- -for example, patent (R & D) races as well races to be the first to enter a market. We are able to provide an explanation, for instance, for why in times of economic crisis (such as wars) most economies abandon reliance on market mechanisms.
Keywords: Incentives; Information; Organizational Design; Market Mechanisms; Resource Allocation
JEL Codes: D23; D82; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Traditional economic models (Arrow-Debreu) (D52) | Exaggeration of market efficiency in resource allocation under incomplete information (D83) |
| Traditional economic models (Arrow-Debreu) (D52) | Pareto inefficiencies (D61) |
| Decision-making processes within organizations (D70) | Efficiency of resource allocation (D61) |
| Collective decision-making dynamics (D70) | Decision-making processes within organizations (D70) |
| Technological change (O33) | Allocation of time (J29) |
| Monopoly power (D42) | Innovation (O35) |