Organizational Economics
Organizational economics is a branch of applied economics and New Institutional Economics that studies the transactions occurring within individual firms, as opposed to the transactions that occur within the greater market. Organizational economists study how economic incentives, institutional characteristics, and transaction costs influence the choices made within firms and the structure and market performance of firms.Organizational economics can include theories from several different streams of economic thought. These include agency theory, transaction cost economics, contract or property rights theory, theories of the firm, strategic management studies, and theories of entrepreneurship. Theory and research in organizational economics often incorporate insights, concepts, and methods from disciplines other than economics, too, including psychology and sociology. Courses in organizational economics are usually taught at the graduate or doctoral level.
Organizational Economics
Definition
Organizational Economics is a branch of applied economics and new institutional economics that studies transactions occurring within individual firms rather than in larger markets. It focuses on how economic incentives, institutional characteristics, and transaction costs influence internal choices within firms, as well as the structure and market performance of firms.
Origin
Organizational Economics originated in the mid-20th century as economists became increasingly interested in the internal mechanisms of firms. Key milestones include the rise of agency theory and transaction cost economics in the 1970s, which laid the foundation for this field.
Categories and Characteristics
Organizational Economics encompasses several theoretical streams:
- Agency Theory: Studies the relationship between principals and agents, focusing on how to design incentive mechanisms to reduce agency costs.
- Transaction Cost Economics: Examines how transaction costs influence the choice between internal organization and market transactions.
- Contract or Property Rights Theory: Investigates how contract and property rights arrangements affect firm behavior and performance.
- Theory of the Firm: Explores the nature, boundaries, and internal structure of firms.
- Strategic Management Research: Focuses on how firms formulate and implement strategies to gain competitive advantage.
- Entrepreneurship Theory: Studies the creation and development process of new enterprises.
Specific Cases
Case 1: Application of Agency Theory in Corporate Governance
A company designs a performance-based compensation mechanism to reduce moral hazard among executives. By linking executive pay to company performance, the mechanism incentivizes executives to work for the long-term benefit of the company.
Case 2: Application of Transaction Cost Economics in Outsourcing Decisions
A manufacturing company decides to outsource certain production processes to third-party suppliers. By analyzing the transaction costs of internal production versus outsourcing, the company finds that outsourcing can reduce costs and improve efficiency, leading to the decision to outsource.
Common Questions
Question 1: How does Organizational Economics differ from traditional economics?
Organizational Economics focuses on internal transactions and decisions within firms, while traditional economics is more concerned with market-level transactions and price mechanisms.
Question 2: How can Organizational Economics theories be applied to improve firm performance?
By analyzing internal incentive mechanisms, transaction costs, and contract arrangements, more effective management strategies and organizational structures can be designed to enhance firm performance.
