Bounded Rationality in the Economics of Organization Present Use and (Some) Future Possibilities

The way in which bounded rationality enters contemporary organizational economics theorizing is examined. It is argued that, as it is being used, bounded rationality is neither necessary nor sufficient for producing the results of organizational economics. It is at best a rhetorical device, used for the purpose of loosely explaining incomplete contracts. However, it is possible to incorporate much richer notions of bounded rationality, founded on research in cognitive psychology, and to illuminate the study of economic organization by means of such notions. A number of examples are provided.Varieties of bounded rationality, incomplete contracts, economic organization, cognitive psychology

The Problem With Bounded Rationality On Behavioral Assumptions in the Theory of the Firm

I discuss and compare alternative approaches to integrating bounded rationality with the theory of economic organization, concentrating on the organizational capabilities approach, which is strongly influenced by the works of Nelson and Winter, organizational economics, particularly transaction cost economics, and, finally, a small subset of the literature on biases to judgment and cognition. I argue that, contrary to the conventional view, both the organizational capabilities approach and transaction cost economics treat bounded rationality rather “thinly,” the former being in actuality more taken up with organizational routines than individual boundedly rational behavior, the latter only invoking bounded rationality to the extent that it helps explaining incompleteness of contracting. The rich literature on cognitive biases, etc. suggests a “thick” approach to bounded rationality that may be helpful with respect to furthering the theory of economic organization. Examples pertaining to the internal organization of firms are provided.capability, organizations, transaction costs

Learning and Governance in Inter-Firm Relations

This article connects theory of learning with theory of governance, in the context of inter-firm relations.It recognizes fundamental criticism of transaction cost economics (TCE), but preserves elements from that theory.Two kinds of relational risk are identified: hold-up and spillover risk.For the governance of relations, i.e. the control of relational risk, the article presents a set of instruments that includes trust, next to instruments adopted and adapted from TCE.It also includes roles for gobetweens.Some references to empirical evidence are included.Inter-firm alliances;learning;transaction costs;governance

Firms, Incomplete Contracts and Organizational Learning

This explorative paper argues that the central problem of economic organization is adaptation to unforeseen contingencies. However, flexibility is a rather neglected issue in the theory of economic organization. This contrasts with much organization theory, in which the seeking and processing of information about the organization's key uncertainties is seen as a determinant of organizational form. The notion of incomplete contracts is argued to provide a means to bridging ideas from organizational economics and organization theory, particularly organizational learning. Incomplete contracts are not only important because they provide room for incentive problems, but more importantly because they allow firms to exploit processes of organizational learning that must always involve some unforeseen contingencies. Firms are seen as efficient institutional responses to learning processes that involve strongly complementary problem-solving activities.The theory of economic organization, incomplete firm contracts, organizational learning, t

Contracts, relationships and innovation in business-to-business exchanges

Purpose: – This paper aims to contrast two approaches to the study of contracts in business and industrial marketing: first, as a legal document in shaping at the outset exchanges and interactions, for instance in projects; and second, as relational norms in becoming integrated into a business relationship through interactions, for instance as a resource. Design/methodology/approach: – The paper draws on cross-case comparison of three projects, as actors develop an engineering service for optimizing the maintenance of large-scale capital equipment by analyzing real-time data from sensors and user records. Comparison is by coding interview and observational data as micro-sequences of interactions among actors. Findings: – Preparing contracts allows a project to commence and is an early form of interaction, intensifying new relationships or cutting into and recasting established ones. Relational norms augment and can supersede the early focus on the contract, thus incorporating incremental innovation and absorbing some uncertainties. Research limitations/implications: – The research approach benefits from detailed comparison and captures some variety across its three cases, but the discussion is limited to theoretical generalization. Practical implications: – The analysis and discussion highlights and focuses on when different approaches to understanding contracting are more apparent across durable business relationships. Transitions from a contractual document to a view of relational norms are subtle, vulnerable and not always made successfully. Originality/value: – This paper’s originality is in it comparison of overlapping approaches to understanding businesses’ uses of contacts in business and industrial marketing, of contract and relational norms. It develops a valuable research proposition, in the transition from a mainly contractual to a mainly relational uses of contracts, thus identifying contract as a particular business resource, to be deployed and embedded

Contractual Dimensions and Buyer-Supplier Perceived Risk: the Moderating Role of Information Technology Integration.

Contract is widely conceived as an effective approach to decrease risk perception and resolve disputes. However, previous literature on the link between contracts and risk perception is contradictory, wherein both positive and negative findings exist. This study provides a novel insight about the mechanism of contractual dimensions and considers the boundary conditions of information technology (IT) integration. Data collected from 225 retailers of a manufacturer support most hypotheses. Specifically, contractual complexity has positive influence on relational risk and contractual recurrence has negative influence on both performance and relational risk. This study further reveals the positive moderating effect of IT integration on the influence of contractual complexity on relational risk and the negative effect of IT integration on the influence of contractual recurrence on relational risk and performance risk. Implications and limitations of the study are discussed

Revealed Unawareness

I develop awareness-dependent subjective expected utility by taking unawareness structures introduced in Heifetz, Meier, and Schipper (2006, 2008, 2009) as primitives in the Anscombe-Aumann approach to subjective expected utility. I observe that a decision maker is unaware of an event if and only if her choices reveal that the event is "null" and the negation of the event is "null". Moreover, I characterize "impersonal" expected utility that is behaviorally indistinguishable from awareness-dependent subject expected utility and assigns probability zero to some subsets of states that are not necessarily events. I discuss in what sense impersonal expected utility can not represent unawareness.Unawareness, awareness, unforeseen contingencies, null, zero probability, subjective expected utility, Anscombe-Aumann, small worlds, extensionality of acts, event exchangeability

Revealed Unawareness

I develop awareness-dependent subjective expected utility by taking unawareness structures introduced in Heifetz, Meier, and Schipper (2006, 2008, 2009) as primitives in the Anscombe-Aumann approach to subjective expected utility. I observe that a decision maker is unaware of an event if and only if her choices reveal that the event is "null" and the negation of the event is "null". Moreover, I characterize "impersonal" expected utility that is behaviorally indistinguishable from awareness-dependent subject expected utility and assigns probability zero to some subsets of states that are not necessarily events. I discuss in what sense impersonal expected utility can not represent unawareness.Unawareness; awareness; unforeseen contingencies; null; zero probability; subjective expected utility; Anscombe-Aumann; small worlds; extensionality of acts; event exchangeability