Organizational Economics

ROBERT GIBBONS and JOHN ROBERTS1

Abstract
Organizational economics applies the theoretical and empirical methods of eco-
nomics to study the nature, roles and performance of organizations, especially
managed ones like business firms. In this essay we trace the development of this
field, survey the questions it addresses, point to recent work that we find especially
germane and offer suggestions for promising future directions.

Organizational economics is the application of economic logic and meth-

ods to understand the nature, design and performance of organizations,
especially managed ones such as business firms. Several distinguished
economists addressed organizational issues during the first two centuries
of the discipline, but the profession as a whole paid scant attention to orga-
nizations. During the 1970s, however, a collection of seminal contributions
laid the foundations for the modern field. As a result, the past 35 years
have witnessed two developments: First, economists (often in business
schools) have produced a large and growing literature directly addressing
organizational issues; second, economists in other fields (beginning with
industrial organization and labor, and now including corporate finance,
development, political economy, and international trade) have asked orga-
nizational questions and applied organizational results within their own
fields.
In the first half of this essay, we sketch these developments: the roots of
organizational economics during the first two centuries of the discipline; the
seminal contributions from the 1970s; and the rapid recent growth of both
research in organizational economics per se and applications of this research
in other fields of economics. All this might constitute an “Emerging Trend”
appropriate for this volume, but we see it as prelude to the story we wish to
tell (and the future we hope to help shape), in three related respects. First,
while we understand both career pressures and comparative advantage,
1. Parts of this essay draw heavily on Gibbons and Roberts (2013) and are used with permission.

Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.

1
2 EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

we see few organizational economists studying related work in other social

sciences. Second, we see important gaps in what economists have studied
within organizational economics. Third, while it is both common and per-
haps natural for economists to be trained to use markets as the benchmark
and framework for their thinking, we follow Simon (1991) in (i) noting the
enormous range of interactions that neither have been nor perhaps could
or should or will be conducted in markets and hence (ii) asking whether
“organizational economy” might be at least as useful a metaphor as “market
economy.”

THE ROOTS OF ORGANIZATIONAL ECONOMICS

Smith (1776) was concerned that directors of joint-stock companies would
have inadequate incentives to provide proper oversight, and his pin-factory
description is a discussion of job design (although he did not analyze why
these activities were organized within a single firm). A century later, the
founding president of the American Economic Association, Walker (1887),
argued in the first volume of the Quarterly Journal of Economics that differences
in the quality of management account for persistent differences in productiv-
ity and profitability across firms within an industry. Knight (1921) discussed
entrepreneurship and the nature of the firm, which he saw as an institu-
tion in which the more uncertainty-averse worked for fixed wages while the
entrepreneur bore the risk but had authority over the employees. Berle and
Means (1932) described conflicts of interest arising from the separation of cor-
porate ownership by shareholders from corporate control by top managers.
Coase (1937) raised the question of the vertical boundaries of the firm, argu-
ing that economizing on the costs of market transactions would lead some
activities to be removed from the market and brought inside the firm under
hierarchic control.
Simon (1951) offered perhaps the first formal model in organizational
economics, treating the employment relationship as the acceptance and
use of authority—rather than contracting—over particular activities as
a response to uncertainty and the need for speedy adaptation. Penrose
(1959) studied managerial activities and decision-making, organizational
routines, and knowledge creation within firms and argued that these are
critical determinants of the success and growth of firms. Chandler (1962,
1977) documented the historical emergence of the modern corporation and
professional management.
At the edges of economics, there was related work in organization theory.
Barnard (1938) was one of the earliest contributors, seeing organizations as
systems of collaborative activity and discussing the roles of incentives and
authority in the formal and informal aspects of organization. Building on
 Organizational Economics 3

Barnard, the Carnegie School then focused on two major issues: bounded
rationality, and conflict of interests. Simon (1947) and March and Simon
(1958) asked how the organization can orchestrate the acquisition and
communication of information and the allocation of decision-making to
produce a tolerable outcome for the organization when its members are
boundedly rational. Cyert and March (1963) argued that “People (i.e.,
individuals) have goals; collectivities of people do not” and that “[s]ince the
existence of unresolved conflict is a conspicuous feature of organizations, it
is exceedingly difficult to construct a useful positive theory of organizational
decision making if we insist on internal goal consistency.” Instead, March
(1962) described “The Business Firm as a Political Coalition,” where conflict,
collusion, negotiation and strategic interactions are the norm.
Reflecting on these early developments, Arrow (1964, pp. 397–408) noted
that “The large organization, so prominent on our contemporary social land-
scape, is of great antiquity. … But it is perhaps only in our era, and even
then haltingly, that the rational design of organization has become a subject
of inquiry.” Around 1970, however, the field began to take off.

MODERN FOUNDATIONS OF ORGANIZATIONAL ECONOMICS

Many important contributions in the 1970s concerned the nature and
boundaries of the firm. Following Coase, Williamson (1971, 1975) proposed
a theory of the replacement of market dealings by authority within the firm,
based on the potential for inefficient haggling when unplanned adaptations
are required. In contrast, Alchian and Demsetz (1972) argued against the
idea that the firm is a manifestation of authority, proposing instead that
the firm was best viewed as a collection of contracts. Richardson (1972)
undercut the simple firm-versus-market dichotomy by accentuating the
great variety of organizational forms and relationships between firms that
actually populate the economy, and he wrote convincingly of the role
of capabilities—information, knowledge and skills—in determining the
effectiveness of activities within and between firms. And Klein, Crawford,
and Alchian (1978) and Williamson (1979) explored the consequences of
specific assets (ones whose value in their intended use far exceeds their
value in other uses) and hold-up (opportunistic renegotiation to expropriate
returns to specific assets) for firms’ make-or-buy decisions and contracting
between firms.
Other important contributions focused inside organizations. Arrow’s
(1974) beautiful little book addressed topics ranging from authority and
codes to responsibility, trust, and values. Nelson and Winter (1982) wrote
in evolutionary terms about organizational routines that enable the orga-
nization to do what it does. And Jensen and Meckling (1976) provided
4 EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

the first treatment of agency costs (deviations from efficiency occasioned

by self-serving behavior by managers) as a necessary consequence of the
separation of ownership from control.
In formal modeling, Marschak and Radner (1972) modeled optimal com-
munication and decision-making processes in uncertain environments with
dispersed information but shared objectives. Hurwicz (1973) introduced the
concept of incentive compatibility and initiated mechanism-design theory,
where the institutions used to allocate resources become a choice variable,
thereby setting the stage for formal economic analysis of organizational
design. And Mirrlees (1975/1999) and Holmstrom (1979) introduced formal
models of moral hazard (socially inefficient behavior occasioned by it
not being possible to make the actor bear all the costs and benefits of her
actions), launching a literature that would have tremendous influence on
organizational economics.

EMERGENCE OF A FIELD
These early contributions laid the foundations for the large literature that has
emerged in the last 30 plus years. Extrapolating from this early work suggests
a wide range of issues for organizational economics, including the follow-
ing.2 What are the vertical boundaries of the organization: what is bought
from outside and what is made inside, for the firm’s own use? How are
relations with suppliers and customers organized: in arm’s-length market
dealings or through long-term relationships? Who owns which of the assets
used in production? How are the activities of the organization financed? How
is governance defined and exercised, both within the organization and by
different parties with ownership or other claims? What are the horizontal
boundaries of the firm: what products or services does it produce, for what
users, using what technologies, and in what locations? How are subunits
within the firm defined, linked and coordinated? How are resources of dif-
ferent types allocated? Where does decision-making on different issues occur
within the organization? What is the role of hierarchy, how many levels are
there, and what are the spans of control (the number of individuals report-
ing directly to a hierarchic superior)? What are the behavioral and perfor-
mance effects of delegation? Is the organization fundamentally an expression
of authority or is it a “nexus of contracts?” What are the roles of formal,
legally enforceable contracts within and between organizations versus rela-
tional contracts (shared understandings that cannot be enforced in courts
and so must be self-enforcing, perhaps through reputation concerns)? How is
power achieved and exercised, and what role does politics play within orga-
nizations? What information is collected on different matters, by whom, to
2. We phrase these questions in positive terms, but their normative versions are equally important.
 Organizational Economics 5

whom is it communicated, and how is it used? How is performance mea-

sured? How are people recruited, trained and assigned to jobs? How are they
evaluated and rewarded? What effects do rewards have on behavior? What
norms exist regarding behavior towards others within the organization, as
well as outsiders, and how do these affect actual behavior and organiza-
tional performance? How are transgressions against organizational rules and
norms treated by different parties? How do other aspects of “corporate cul-
ture” manifest themselves and affect behavior? What is the nature and role
of leadership in organizations? And, finally, how do the answers to these
questions depend on the markets in which the organization operates, the
strategies it adopts to compete, and the social, legal, regulatory and techno-
logical environment in which it is embedded, and how do all of these choices
interact and affect performance?
To claim all this as being within the purview of organizational economics is
an act of significant intellectual imperialism. In Section 4 below, we therefore
mention areas where there has been or could be significant cross-pollination
between organizational economics and related work in other social sciences.
For the remainder of this section, however, we use the structure of The Hand-
book of Organizational Economics (Gibbons & Roberts, 2013) to suggest how
existing work in organizational economics has begun to address many of the
topics just mentioned.
The Handbook consists of six parts. Part I contains foundational material
on incentives, property rights, transaction-cost economics, and comple-
mentarities. On incentives, pay for performance is obviously one means
of motivating people in organizations, but there are also nonfinancial
means of motivation, as well as incentive contracts in other settings besides
employment (such as contracts between firms). Property rights (the powers
that come with ownership) are a central issue in organizational economics,
leading to analyses of the boundaries of the firm and of authority structures
within organizations. Transaction-cost economics examines contracting
processes in great detail—not only the writing of contracts but, more
importantly, the living of them. Finally, the theory and econometrics of
complementarity provide an alternative to the usual assumptions in microe-
conomics (concavity, divisibility, etc) that allows modeling organizational
questions with great richness and still permits drawing strong conclusions.
Part II describes three empirical research methods that loom large in organi-
zational economics but may not be completely familiar to those not involved
in the field: case studies, experiments, and “insider econometrics.” Clinical
or case studies have played an important role in organizational economics,
at least since Klein et al.’s (1978) discussion of the troubled contractual rela-
tionship between General Motors and Fisher Body, which culminated in the
former’s acquisition of the latter. Experiments—both in the lab and, more
6 EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

recently, in the field—play a major role in studying organizational issues. The

chapter describes a number of such studies and explicates what makes for a
good experimental study. Finally, insider econometrics involves formulation
of hypotheses and econometric analysis of data whose collection inside orga-
nizations is guided by detailed knowledge of the phenomena gained both
from insiders (managers and other employees) and from indepth personal
observation.
Each part in the remainder of the Handbook then focuses on a specific set
of organizational issues. Part III studies individuals and groups within orga-
nizations, including three contributions on employment, two on authority,
power, politics, and influence, and one on culture and leadership. The three
chapters on employment illustrate the significant intersection between orga-
nizational economics and personnel economics, as well as connections to eco-
nomic sociology and human resource management. The other three chapters
in Part III can be seen as discussing different aspects of decision-making in
organizations, often echoing Barnard and the Carnegie School’s view of “the
organization as a decision-making process” (Cyert & March, 1963 [1992], p.
202), in which individuals compete for resources, power and influence and
use information as a strategic tool and in which some parties attain particular
influence through various means.
Part IV studies structures and processes within organizations, with two
chapters on hierarchy and individual chapters on corporate governance,
innovation and organization, the connection between strategy and organi-
zation, resource allocation within firms, and organizational capabilities. The
two chapters on hierarchy are complements, in that one follows the emphasis
in Simon (1947), March and Simon (1958), and Marschak and Radner (1972)
on the acquisition, communication, and processing of information, to the
exclusion of incentive issues, whereas the other focuses entirely on the ways
in which hierarchy may either ameliorate or exacerbate incentive issues
[relative to Hurwicz’s (1973) mechanism-design approach, which seems
to offer a centralized method for all organizational communication and
decision-making]. The chapters on corporate governance and innovation
connect to other fields within economics, such as law and economics on the
one hand and growth on the other, with the governance chapter building
on themes from Smith (1776) and Jensen and Meckling (1976), and the
innovation chapter on themes from Knight (1921) and Penrose (1959).
And the chapters on strategy, resource allocation, and capabilities connect
to management research on strategy, corporate finance, and managerial
practices, echoing Walker (1887), Penrose (1959), Chandler (1962, 1977), and
Nelson and Winter (1982).
Part V considers the boundary of the firm, contracts between firms, and
multi-firm governance structures, with chapters on vertical integration,
 Organizational Economics 7

the empirics of contracting between firms, hybrid organizations, relational

incentive contracts, contract law and economics, and legal forms of orga-
nization. The chapters on vertical integration and contracting illustrate
connections between organizational economics and industrial organization
(building on Coase, 1960; Klein et al., 1978; Williamson, 1971), and the
chapter on hybrids—such as alliances, joint ventures, consortia, and so
on—illustrates the rich middle ground between integration and simple con-
tracting (building on Richardson, 1972). The chapter on relational incentive
contracts is cast in terms of buyer-supplier relations but applies as well
within firms and so complements the early chapter on incentives (building
on Mirrlees, 1975; Holmstrom, 1979). The chapters on legal contracting and
legal forms illustrate connections with the legal literatures on contracts and
organizations (connecting to Alchian & Demsetz, 1972).
Finally, although much of the foregoing could be applied to organizations
other than firms, Part VI explicitly adopts this focus, with chapters by on
corruption and on government agencies. The corruption chapter applies a
mechanism-design approach to understanding both the endogenity and the
net costs and benefits of corruption, illustrating connections to economic
development, whereas the chapter on agencies informally applies ideas
about organizational design and performance to understand the complexity
(and, at times, seeming perversity) of government agencies, illustrating
connections to political science.

CONNECTIONS TO OTHER SOCIAL SCIENCES

As we have noted, organizational economics overlaps with many other fields
within economics. For example, there is a large intersection with personnel
economics, which studies managing human resources within firms. Indus-
trial organization has also has significant overlaps, sharing interest in the ver-
tical and horizontal scope of the firm, supplier relations and other contracts
between firms, and the sources and competitive consequences of productiv-
ity differences. More recently, international economics has begun investigat-
ing outsourcing and offshoring, as well as the multinational corporation, all
of which raise organizational issues. In addition, development economics
is studying the role of firms in economic growth, including the effects on
their productivity of improving their organization and management. And
researchers studying different economic systems and the transition from one
to another—both historically and today—also share interests with organiza-
tional economics.
There are also important connections with disciplines beyond economics.
The law literature has central interests in contracts and in governance.
Social psychology has concerns with motivation, decision-making and
8 EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

culture. Organizational sociology (and, more recently, economic sociology)

studies firms, markets, and networks. And political science studies decision
processes in government agencies, legislatures, communities, and more. See
Smelser and Swedberg (2005) for surveys of work in one other social science
and Ostrom (1990) for a leading example of work from another.
Within business schools, scholars in organizational behavior have not
only harnessed the insights of psychology and sociology to understand
firms, they have also developed large bodies of research on issues from
compensation and job design to justice, leadership and organizational
change. And the overlaps between organizational economics and other
areas of management are also significant. Corporate finance is concerned
with the allocation of resources within the firm, the effects of the financing
of the firm on managerial behavior and firm performance, and issues of cor-
porate governance. Managerial accounting is also concerned with resource
allocation inside firms and with internal governance, as well as with acquir-
ing and communicating information and with performance measurement
and pay. Marketing addresses relations with suppliers and customers and
also the management of sales forces. Operations management studies the
organization and management of supply chains, as well as the organization
and management of firms themselves. And strategic management studies
organizational capabilities (as a source of competitive advantage) and the
vertical and horizontal boundaries of the firm (as a problem of corporate
strategy). See Baum (2002) for potential connections between organizational
economics and some management fields.

GROWTH AREAS IN ORGANIZATIONAL ECONOMICS

There are other issues and areas of research that we see as important for
the future of the field. For example, much of the field is lopsidedly theo-
retical, so it will be important to strengthen the empirical side of the field,
probably using all three of the methodologies mentioned above: case studies,
experiments, and insider econometrics, as well as more standard empirical
methods. See Bandiera, Barankay, and Rasul (2011) on field experiments in
organizations, which we see as an especially promising approach
Turning from methods to topics, within economics there is now enormous
potential for work on the connections between organizations and economic
development: productivity in low-income countries may well depend on
macroinstitutions (such as the extent of contract enforcement, to name just
one), but it may also depend on the micro details of how individual transac-
tions and ongoing interactions are structured and managed, both within and
between firms. And for countries at almost all income levels, there also seems
large potential for work relating organizations and international economics,
 Organizational Economics 9

including the structures and processes of multinationals, contracts between

trading partners, and the location, structure, and management of a firm’s
international investments.
Perhaps moving from economics departments towards business schools,
we also see the need for work on corporate governance and on the con-
nections between organizations and strategy. On corporate governance, it is
staggering how much of organizational economics implicitly imagines that
a firm has a single owner (“the principal”); we need much more work on
both how boards represent owners and how boards manage top executives.
And on strategy, it is also staggering how infrequently organizational eco-
nomics explicitly considers competition; we need much more work on how
organizations differ in different competitive environments, as well as on why
firms that lead their industries may nonetheless be unable to drive out lag-
ging firms.
Moving beyond business firms, we also hope to see much more research
on different organizational forms. Legislatures, government bureaus and
departments, courts, political parties, clubs, cooperatives, mutuals, family
firms, state-owned enterprises, charities and not-for-profits, hospitals,
universities, and schools—all raise interesting organizational issues and
deserve more attention than they have received. In particular, we hope that
organizational economics will someday be seen as indispensable to impor-
tant discussions about change management and productivity improvement
in education and health care.
Fortunately, not only have specific research streams begun in many of these
areas, but there has also recently emerged a crucial new dimension of orga-
nizational economics that may be important for all the research streams just
mentioned: the economic analysis of management. While economics has had
a huge impact on the teaching and practice of management, the phenomenon
of management has been largely ignored by economists. With conspicuously
few exceptions, managers simply do not appear in economics papers, theo-
retical or empirical.3 But that is beginning to change.
Progress has been strongest on the empirical side. For example, an early
contribution by Bertrand and Schoar (2003) showed that CEOs’ personal
characteristics influence firm policies and performance.
Less directly about management, but hugely influential for their impact
on research, are observations that even in competitive industries with sim-
ple technologies and homogeneous products, the top 10% of firms are often
twice as productive as the bottom 10% (Syverson, 2011). This disparity seems
shocking to many economists.

3. To be more precise, we mean that managers in the middle of a hierarchy—not principals, who own
the firm, nor agents, who manage nobody—have almost never appeared in economics papers.
10 EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Partly in response to such evidence, Bloom and Van Reenen (2007) launched
a survey of establishments concerning a list of eighteen management prac-
tices in three broad areas. They found that adoption of these practices
correlates strongly with several measures of performance. Bloom et al. have
deepened this research program substantially, including greatly expanding
the number of firms, countries, and kinds of organizations surveyed, expand-
ing the conception of management to include organizational structure, and
exploring the connection between management and information-technology
productivity.4 They find great variation in the adoption of different practices
within and across sectors, industries and nations. They also show strong
connections between management practices and performance. That these
connections may be causal is supported by a major randomized controlled
experiment measuring changed management practices and performance
effects (Bloom, Eifert, McKenzie, Mahajan, & Roberts, 2013).
Complementing our call for more empirical work, we need to develop eco-
nomic theories of management, including ones that will give us insight at the
macro level. While large-scale, broad-sample surveys are a terrific step for-
ward for generating stylized facts and testing hypotheses, it may be that the
insider-econometrics approach described above get us closer to understand-
ing what managers actually do and hence will also play an important role in
developing testable economic theories of management and productivity.
Finally, we are only too aware that the vast bulk of the work discussed
here is rooted implicitly in the institutional context of the English-speaking
economies, which reflects the state of organizational economics research and
the general pattern of economic work. We would very much like to see this
imbalance righted.

THE ORGANIZATIONAL ECONOMY?

Arrow (1974, p. 33) argued that “Organizations are a means of achieving the
benefits of collective action in situations where the price system fails,” thus
including not only business firms but also consortia, unions, legislatures,
agencies, schools, churches, social movements, and beyond. All such orga-
nizations share “the need for collective action and the allocation of resources
through nonmarket methods” (1974, p. 26), suggesting that there is a wide
variety of possible structures and processes for decision-making in organiza-
tions, including dictatorship, coalitions, committees, and much more.
We strongly endorse both the range of organizations and the variety
of structures and processes that Arrow contemplates. In fact, we are so
enamored with this these ideas that we see them virtually everywhere.

4. See Bloom, Sadun, and Van Reenen (2012) for references to the many papers produced by this team.
 Organizational Economics 11

For example, McMillan (2002, pp. 168–179) estimated that over 70% of U.S.
economic activity occurs within firms; see Hart (2008) for other statistics
with the same flavor. In addition, as Richardson (1972) observed, there is
much additional economic activity between firms that is structured and
managed rather than being arm’s-length and market-mediated. Finally,
there is a great deal of economically relevant activity that does not involve
firms—from the conduct of, say, government agencies at one extreme to
resource allocation within, say, families or villages at the other. In short, as
Simon (1991) noted, much activity that is important to the economy neither
has been nor perhaps could or should or will be conducted in markets. As
a result, Simon asks whether “organizational economy” might be at least
as useful a metaphor as “market economy” for guiding not only economic
research but also economics teaching.
In addition to asking where organizations are, we have also hinted at what
organizations are. Here combining Coase (1937) with Coase (1960) antici-
pates Arrow’s first comment: If contracts were perfect, why would we need
firms? But Arrow’s first comment has implications for his second: If con-
tracts are imperfect, we cannot expect (first-best) efficient outcomes; instead,
imperfect contracting in organizational settings produces the conflict, collu-
sion, and strategic behavior described by March (1962) and Cyert and March
(1963)—that is, second-best efficiency, at best. Put more dramatically, orga-
nizations often fail (either in individual projects or as entire entities), with
important economic consequences; see Garicano and Rayo (2015) for more
in this vein.
In sum, we see the prospect of a coherent field here—with topics that
relate to each other and methods that cut across topics. In addition, we
see exceptional potential for several dialogues—between theoretical and
empirical researchers, between research and practice, and between organi-
zational economics and other fields of economics and other social sciences
and management disciplines. Finally, turning from research to teaching,
we think it is possible and desirable to teach undergraduate and doctoral
courses in organizational economics, thereby training a larger generation
who can not only continue but leverage the exciting developments from the
1970s to today.

REFERENCES

Alchian, A., & Demsetz, H. (1972). Production, information costs, and economic orga-
nization. American Economic Review, 62, 316–325.
Arrow, K. (1964). Control in large organizations. Management Science, 10, 397–408.
Arrow, K. (1974). The limits of organization. New York, NY: W.W. Norton & Co.
12 EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Bandiera, O., Barankay, I., & Rasul, I. (2011). Field experiments with firms. Journal of
Economic Perspectives, 25, 63–82.
Barnard, C. (1938). The functions of the executive. Cambridge, MA: Harvard University
Press.
Baum, J. (2002). Companion to organizations. Oxford, England: Blackwell.
Berle, A., & Means, G. (1932). The modern corporation and private property. New York,
NY: Harcourt, Brace and World.
Bertrand, M., & Schoar, A. (2003). Managing with style: The effect of managers on
firm policies. Quarterly Journal of Economics, 118, 1169–1208.
Bloom, N., Eifert, B., McKenzie, D., Mahajan, A., & Roberts, J. (2013). Does manage-
ment matter? Evidence from India. Quarterly Journal of Economics, 128, 1–51.
Bloom, N., Sadun, R., & Van Reenen, J. (2012). Management as a technology. Working
Paper, Stanford University.
Bloom, N., & Van Reenen, J. (2007). Measuring and explaining management practices
across firms and countries. Quarterly Journal of Economics, 122, 1351–1408.
Chandler, A. (1962). Strategy and structure. Cambridge, MA: MIT Press.
Chandler, A. (1977). The visible hand. Cambridge, MA: Harvard University Press.
Coase, R. (1937). The nature of the firm. Economica, 4, 386–405.
Coase, R. (1960). The problem of social cost. Journal of Law and Economics, 3, 1–44.
Cyert, R., & March, J. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ:
Prentice–Hall.
Garicano, L., & Rayo, L. (2015). Why organizations fail: Seven simple models and
some cases. Journal of Economic Literature (Forthcoming).
Gibbons, R., & Roberts, J. (2013). Introduction. In R. Gibbons & J. Roberts (Eds.), The
handbook of organizational economics. Princeton, NJ: Princeton University Press.
Hart, O. (2008). Reference points and the theory of the firm. Economica, 75, 404–411.
Holmstrom, B. (1979). Moral hazard and observability. Bell Journal of Economics, 10,
74–91.
Hurwicz, L. (1973). The design of mechanisms for resource allocation. American Eco-
nomic Review, 63(2), 1–30.
Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency
costs and ownership structure. Journal of Financial Economics, 3, 305–360.
Klein, B., Crawford, R., & Alchian, A. (1978). Vertical integration, appropriable rents
and the competitive contracting process. Journal of Law and Economics, 21, 297–326.
Knight, F. (1921). Risk, uncertainty and profit. Boston, MA: Hart, Schaffner & Marx.
March, J. (1962). The business firm as a political coalition. Journal of Politics, 24,
662–678.
March, J., & Simon, H. (1958). Organizations. New York, NY: John Wiley & Sons.
Marschak, J., & Radner, R. (1972). Economic theory of teams. New Haven, CT: Yale
University Press.
McMillan, J. (2002). Re-inventing the bazaar: A natural history of markets. New York, NY:
W.W. Norton.
Mirrlees, J. (1975). The theory of moral hazard and unobservable behaviour: Part I
Published in. Review of Economic Studies, 66(1999), 3–21 (Unpublished manuscript,
Oxford University).
 Organizational Economics 13

Nelson, R., & Winter, S. (1982). An evolutionary theory of economic change. Cambridge,
MA: Harvard University Press.
Ostrom, E. (1990). Governing the commons: The evolution of institutions for collective
action. Cambridge, UK: Cambridge University Press.
Penrose, E. (1959). The theory of the growth of the firm. New York, NY: Wiley.
Richardson, G. (1972). The organisation of industry. Economic Journal, 82, 883–896.
Simon, H. (1947). Administrative behavior. New York, NY: The Free Press.
Simon, H. (1951). A formal theory of the employment relationship. Econometrica, 19,
293–305.
Simon, H. (1991). Organizations and markets. Journal of Economic Perspectives, 5,
25–42.
Smelser, N., & Swedberg, R. (2005). The handbook of economic sociology (2nd ed.).
Princeton, NJ: Princeton University Press.
Smith, A. (1776 [1977]). An inquiry into the nature and causes of the wealth of nations.
Chicago, IL: University of Chicago Press.
Syverson, C. (2011). What determines productivity? Journal of Economic Literature, 49,
326–365.
Walker, F. (1887). The source of business profits. Quarterly Journal of Economics, 1,
265–288.
Williamson, O. (1971). The vertical integration of production: Market failure consid-
erations. American Economic Review, 61, 112–123.
Williamson, O. (1975). Markets and hierarchies: Analysis and antitrust implications. New
York, NY: Free Press.
Williamson, O. (1979). Transaction cost economics: The governance of contractual
relations. Journal of Law and Economics, 22, 233–261.

ROBERT GIBBONS SHORT BIOGRAPHY

Robert Gibbons is a faculty member in MIT’s Sloan School and MIT’s
Department of Economics, where he teaches management and PhD courses
(respectively) and has received teaching awards from each. His research
and teaching concern the design and performance of organizations, espe-
cially “relational contracts” (informal agreements so rooted in the parties’
circumstances that they cannot be adjudicated by courts). He is a fellow of
the American Academy of Arts and Sciences and the Econometric Society,
founding director of the NBER working group in organizational economics,
and a former board member at the Citicorp Behavioral Science Research
Council and at the Center for Advanced Study in the Behavioral Sciences.
His text Game Theory for Applied Economists (Princeton University Press,
1992) has been translated into Chinese, Hungarian, Italian, Japanese, and
Spanish; he recently co-edited The Handbook of Organizational Economics
(with J. Roberts, Princeton University Press, 2013); and he is now writing An
Introduction to Organizational Economics, which is intended to make the
14 EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

field accessible to a broad set of theoretical and empirical economists and

other researchers.

JOHN ROBERTS SHORT BIOGRAPHY

John Roberts is the John H. Scully Professor, Emeritus, of Economics, Strate-
gic Management and International Business at the Stanford Graduate School
of Business. Earlier in his career his research focused on economic theory and
game theory and their application to industrial competition. More recently he
has focused on organizational issues, employing both theoretical and empir-
ical methods. He is the coauthor of Economics, Organization and Management
(1992), the first economics text on organizations and management, the author
of The Modern Firm: Organizing for Performance and Growth (2004), named by
The Economist as best business book of the year, and coeditor of The Handbook
of Organizational Economics (2013). A fellow of the Econometric Society and
the American Academy of Arts and Sciences, he has also produced over 70
journal articles and 30 teaching cases.

RELATED ESSAYS
Can Public Policy Influence Private Innovation? (Economics), James Bessen
The Public Nature of Private Property (Sociology), Debbie Becher
Technology Diffusion (Economics), Adam B. Jaffe
Knowledge Transfer (Psychology), Timothy J. Nokes-Malach and J. Elizabeth
Richey
Translational Sociology (Sociology), Elaine Wethington
Economics of Early Education (Economics), W. Steven Barnett
Learning Across the Life Course (Sociology), Jutta Allmendinger and Marcel
Helbig
Innovation (Economics), Adam B. Jaffe
Technology Diffusion (Economics), Adam B. Jaffe
Economics and Culture (Economics), Gérard Roland
Emerging Trends: Asset Pricing (Economics), John Y. Campbell
Authenticity: Attribution, Value, and Meaning (Sociology), Glenn R. Carroll
Institutions and the Economy (Sociology), Carl Gershenson and Frank
Dobbin
Global Economic Networks (Sociology), Nina Bandelj et al.
The Public Nature of Private Property (Sociology), Debbie Becher
Can Public Policy Influence Private Innovation? (Economics), James Bessen
Lawmaking (Political Science), Jamie L. Carson and Mark E. Owens
The State and Development (Sociology), Samuel Cohn
Trust and Economic Organization (Sociology), Karen S. Cook and Bogdan
State
 Organizational Economics 15

Financialization of the US Economy (Sociology), Gerald (Jerry) F. Davis and

Suntae Kim
Architecture of Markets (Sociology), Neil Fligstein and Ryan Calder
Organizational Populations and Fields (Sociology), Heather A. Haveman and
Daniel N. Kluttz
Organizations and the Production of Systemic Risk (Sociology), Charles
Perrow
Inefficiencies in Health Care Provision (Economics), James F. Burgess et al.
Models of Revealed Preference (Economics), Abi Adams and Ian Crawford
From Individual Rationality to Socially Embedded Self-Regulation (Sociol-
ogy), Siegwart Lindenberg
Against Game Theory (Political Science), Gale M. Lucas et al.
Emerging Trends: Asset Pricing (Economics), John Y. Campbell
Globalization of Capital and National Policymaking (Political Science),
Steven R. Hall
Global Economic Networks (Sociology), Nina Bandelj et al.
The Public Nature of Private Property (Sociology), Debbie Becher
Returns to Education in Different Labor Market Contexts (Sociology), Klaus
Schöemann and Rolf Becker
Stability and Change in Corporate Governance (Sociology), Gerald F. Davis
and Johan S. G. Chu
Institutions and the Economy (Sociology), Carl Gershenson and Frank
Dobbin
Behavioral Economics (Sociology), Guy Hochman and Dan Ariely
Family Formation in Times of Labor Market Insecurities (Sociology), Johannes
Huinink
Innovation (Economics), Adam B. Jaffe
Transformation of the Employment Relationship (Sociology), Arne L. Kalle-
berg and Peter V. Marsden
Sociology of Entrepreneurship (Sociology), Martin Ruef
Impact of Limited Education on Employment Prospects in Advanced
Economies (Sociology), Heike Solga