Comments on: Fundamental Questions About Organizations

By: Peter Klein

Peter Klein — Mon, 03 Dec 2007 15:01:42 +0000

Twofish, I certainly do think organizational economics has a lot to say about the relationships among subunits, between subunits and HQ, and among individuals within subunits. I should have said more about this in the original post. Actually I didn’t mention agency problems and collective-action problems at all — major omission! — so a better title would have been “Fundamental Questions About Organizational Boundaries.”

By: twofish

twofish — Mon, 03 Dec 2007 07:23:50 +0000

One way of talking about this is that if you want to sketch out a diagram of organizations, you can do so using a combination of “boxes” and “lines.” If you talk only in terms of organizational forms, then the diagram consists only of boxes, and that I think is insufficient to represent that the behaviors of individuals are.

By: twofish

twofish — Mon, 03 Dec 2007 07:20:47 +0000

One way I think about organizational forms is using the Confucian methodological individualism. You start with the interactions between individuals and move out from that. At the same time another way you can view organizations is how do organizations interact with money and resources.

The problem with the views of organizational forms in economics is that they view only the top level of organization, and don’t view the sub-levels of organization. The top level of organizational form matters because that is where the “internal organization” interacts with the market, but if you want to understand the interaction between organizations and entrepreneurship you have to go into the sub-levels of the organization.

By: spostrel

spostrel — Sat, 01 Dec 2007 02:06:38 +0000

Boundaries are real and do affect strategic and operational issues; it’s just that only some of them are the legal ones having to do with ownership and contracts. There are also boundaries of communication, of loyalty, of shared use of assets, and so on. Some of these boundaries are coterminous with the legal boundaries of the firm, but many of them are not–they either lie entirely inside legal firms or cut across firm boundaries. And in a world of purposive decision makers, the legal and managerial boundaries are determined jointly. I object to the frequent separation, or false opposiiton, of these issues in much of the literature, so I was trying to head that off here.

By: Peter Klein

Peter Klein — Fri, 30 Nov 2007 05:20:28 +0000

Sure, let’s add these questions fo the list. My items were meant as conversation starters, not as a completed set. But I do think the arrangement of ownership and governance rights is critical, and inextricably linked to strategy and operations. Calling these “legal” seems to imply, as in the nexus-of-contracts tradition, that ownership and governance issues are purely formal and distinct from strategic and operational issues. Having just come back from a conference on buyouts and their effect on performance (on which I’ll blog shortly), I have to disagree strongly with the “boundaries-as-a-legal-fiction” approach!

By: srp

srp — Fri, 30 Nov 2007 00:53:39 +0000

It seems like all these questions are about legal ownership structures and the like. There’s nothing here about the aspects of organizational form (and practices) that have to with actually getting work done–developing products, identifying markets, turning inputs into outputs, etc.

When I think about organizational form, the sorts of things that come to mind are functional vs. product vs. geography or formal vs. informal means of coordination. Whether the firm is a proprietorship or a partnership or a holding company or is vertically integrated is important, but only in the context of these other issues that jointly affect the ability of the firm to create and capture economic surplus. I suspect that the focus on legal ownership structures results primarily form data availability, not from relative importance.

By: Peter Klein

Peter Klein — Thu, 29 Nov 2007 20:04:52 +0000

Bo, you sure know how to hit a guy where it hurts.

Bart, that’s an interesting question, one that hasn’t been explored much in my view. The Knightian view does seem to incorporate the idea that transaction cost econommizing is an ability that some entrepreneurs possess more than others, such that efficient organizational design represents an act of entrepreneurial judgment. This relates to Mayer and Argyres’s work on contract design as a firm capability.

If you mean “how does the treatment of uncertainty in the TCE literature, as a co-determinant (with asset specificity) of organizational form, compare to the treatment of uncertainty in the entrepreneurship literature?” then the answer is more complicated, I think. TCE holds that, for given levels of asset specificity, uncertainty increases the likelihood of internal organization (vertical integration). The Knightian view says that the more assets the entrepreneur owns, the more he must exercise judgment in the deployment of those assets, for given levels of uncertainty. Perhaps one could say that the greater the uncertainty, the more likely that assets will tend to be concentrated in the hands of entrepreneurs with particularly good judgment, suggesting a positive correlation between uncertainty and firm size — but this doesn’t take asset specificity into account.

That’s a roundabout way of saying gosh, hmmm, I don’t really know. Somebody needs to write a paper on this!

By: Bo

Bo — Thu, 29 Nov 2007 15:35:56 +0000

Perhaps you are already answering this in 1(c) but “to whom” does organization form matter? You seem to be driven by economic and/or theoretical rationales here rather than managerial/practical orientation. What is the theoretical basis for even asking this question? Organization form is either a (conscious) response to a set of circumstances (by managers with bounded rationality etc) or, more likely, the result of a series of (more or less unrelated) events taking place over time in an evolutionary manner. Either way, why would we expect this to be related to performance above and beyond the fact that “all variables in organizations are related to performance at some level”? You mention the causality issue yourself: certain types of performance may trigger certain types of organizational forms over time - or not..but to whom does the form really matter? To the employees? To the shareholders? To the external stakeholders? To society? or–to you as a scholar with nothing better to do than to look for relationships where none should be expected? :)

By: Bart

Bart — Thu, 29 Nov 2007 14:03:11 +0000

Ad 4: Is there a link between uncertainty in TCE and entrepreneurial judgment over uncertainty?

My practical business sense would say that there is; I consider competence as an important determinant to judgment; there is a lot of variance to entrepreneurial competence; so could entrepreneurial judgment then influence outcomes regarding the internalization/externlization of transactions (org form) based on the uncertainty to the transaction and competence of the person facing the entrepreneurial decision?
Take a shot…

P.s. Still owe you a repsons to the PE post, but couldn’t resisit mingling with this one…