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Organizational Economics

Organizational economics is a branch of economics that studies the transactions that occur within individual firms, as opposed to transactions that occur within the greater marketplace.1 Organizational economics suggests that economic factors are important determinants of the structure and behavior of organizations.

We call this the theory of the firm. The theory of the firm consists of a number of economic theories that describe, explain, and predict the nature of a firm or corporation, including its existence, structure and relationship in the market.2 The theory of the firm aims to answer these questions: why do firms emerge? Why are firms structured in the way that they are? What drives different actions and performances of firms?3

Before the First World War, economic analysis covered industries and the overall market. Ownership of a typical American corporation is spread over a large number of shareholders, leaving control in the hands of managers who own little equity themselves.4 A study of how and why managers and executives manage the way that they do was important to understand the actions and future actions of a firm. In organizational economics, we try to understand the nature of organizations by studying three main ideas: (1) agency theory, (2) transaction costs and (3) and property rights.

In organizational economics, we develop ideas about how a firm should be organized, how interactions within the firm should be governed, how reward systems should be designed, and how management decisions affect risk. These ideas are developed by looking at the interactions within the firm, and how internal and external factors define or influence these interactions. The key take away is that a firm's structure and behaviour cannot be designed by management as if the firm existed in a vacuum. We have to understand that the environment in which an organization conducts its affairs influences the way the organization is organized, and how managers and employees in the firm behave.

Courses in organizational economics are usually taught at the graduate or doctoral level.

 

References:
1. "Organizational Economics." Retrieved from: http://www.investopedia.com/terms/o/organizational-economics.asp.
2. Kantarelis, D. (2007). Theories of the Firm. Geneve: Inderscience.
3. Berle, A. A. and Means, G. C. (1933). The Modern Corporation and Private Property. New York: Macmillan.
4. "Agency Theory." http://www.investopedia.com/terms/a/agencytheory.asp.

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