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How Much Information is There in an Economic Organization and Why Can't Large Ones be Optimal?

By Arthur De Vany

Abstract

Economic organizations represent order and structure. They may be characterized as coalitions of agents bound by multilateral contracts. When a new organization is formed, new information comes into being. This paper defines and measures the amount of information which an economic organization represents. Both information of structure and process are characterized. Information laws of scale are derived. An ``impossibility'' theorem is stated which shows that ``large'' organizations cannot be optimal and realizable in finite time. Large (where even 15 members is large) organizations must contain relationships between agents that are inconsistent or incomplete. This result gives a direct rationale for the theory of bounded rationality and for the existence of internal governance procedures that reconcile the inconsistency and incompleteness of relationships. It also shows why certain, universal social institutions are public goods.organizations, information measurement

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