On completing this chapter, you will gain an economic perspective on: The theory of the firm, market metaphors for organizational design, specific knowledge and decision authority, the effect of organizational design on risk-taking, how organizational design can affect Type I and Type II errors. | Chapter 5: Decision Making 1 11/13/2014 Chapter 5: Decision Making The Organization of an Economy Markets as Information Systems Markets as Incentive Systems Markets and Innovation Benefits of Central Planning The Market as Metaphor for Organizational Design Benefits of Centralization Economies of Scale or Public Goods Better Use of Central Knowledge Coordination Control Benefits of Decentralization Specific versus General Knowledge Information That Is Perishable Information That is Complex Information That Requires Technical Skills Information That is Unforeseeable/Idiosyncratic Information That is Subjective/Experiential Other Benefits of Decentralization Saves Management Time Develops Management Skills Intrinsic Motivation Creativity Decision Management and Control Decision Making as a Multistage Process Creativity versus Control A Tradeoff between Two Types of Errors Three Examples of Authority Patterns Small upside, large downside Large upside, small downside Symmetric payoffs . | Chapter 5: Decision Making 1 11/13/2014 Chapter 5: Decision Making The Organization of an Economy Markets as Information Systems Markets as Incentive Systems Markets and Innovation Benefits of Central Planning The Market as Metaphor for Organizational Design Benefits of Centralization Economies of Scale or Public Goods Better Use of Central Knowledge Coordination Control Benefits of Decentralization Specific versus General Knowledge Information That Is Perishable Information That is Complex Information That Requires Technical Skills Information That is Unforeseeable/Idiosyncratic Information That is Subjective/Experiential Other Benefits of Decentralization Saves Management Time Develops Management Skills Intrinsic Motivation Creativity Decision Management and Control Decision Making as a Multistage Process Creativity versus Control A Tradeoff between Two Types of Errors Three Examples of Authority Patterns Small upside, large downside Large upside, small downside Symmetric payoffs Investments in Better-Quality Decision Making An Application: Air Traffic Routes Summary 2 11/13/2014 Chapter 5: Decision Making On completing this chapter, you will gain an economic perspective on: The Theory of the Firm Market metaphors for organizational design Specific knowledge and decision authority The effect of organizational design on risk-taking How organizational design can affect Type I and Type II errors 3 11/13/2014 Economic Organization 11/13/2014 4 Key Ideas Micro Tools Market Metaphor for organizational design imperfect & asymmetric information agency theory investment different methods of economic contracting How we will use these tools model an organization as a buyer, creator & processor of knowledge emphasize creativity v. control emphasize incentive problems & motivation 5 11/13/2014 Theory of the Firm Fundamental to economic theory Why do firms exist? Available models have distinct approaches Transaction costs Managerial approach Behavioral and/or Team analyses .
