Organizational Economics Theory : A Fundamental And Universal Problem Of Organizations

This situation can lead to negative consequences for a business when its executives or management direct the organization to act in the best interest of themselves instead of the best interest of its owners or shareholders. Stockholders of the enterprise can keep this problem from arises by attempting to align the interest of management with that of themselves. This normally occurs through incentive pay, stock compensation, or other similar incentive packages that now cause the managers financial success to be tied to that of the company (Garcia, Rodriguez-Sanchez, & Fdez-Valdivia, 2015; Cui, Zhao, & Tang, 2007; Bruhl, 2003; Carols & Nicholas,

Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2009). Managerial economics and organizational architecture. Chicago: Irwin.

Kessler, E. H. (Ed.) (2013). Encyclopedia of management theory (Vols. 1-2). Thousand Oaks, CA: SAGE Publications Ltd. doi: 10.4135/9781452276090

Organizations are structured to persevere in an environment of similar organizations, that define institutional legitimacy (DiMaggio & Powell, 1983). Institutional theory emphasizes valuing organizations for having structures and designs that are in “conformance” with the environment. The framework is not solely shaped by resource dependencies and technical aspects, but by institutional forces – rational myths,

Brickley, J.A., Smith, C.W., & Zimmerman, J.L. (2009). Managerial economics and organizational architecture. (5th ed.) New York: McGraw Hil/Irwin.

John McCarthy and Mayer Zald, are attributed to the concept of “Resource Mobilization Theory” by linking formal organization to that of firms.

It is depicted that modern organizations tend to incorporate the aspects of the open systems with those of the natural and rational perspectives. Examples include the institutional, transaction cost, and the contingency and the contingency theories. Organizations adopt the open system that accommodates the other two theoretical perspectives for it to exist (Davis & Scott, 2006). These organizations tend to have structures that are based on the processes, the products, and the function.

According to Miles et al. (1978, p. 547), an organization is both its purpose and the mechanism constructed to achieve the purpose. It means that the concept of organization is embracing both goals and all the elements that represent unique combination. Miles et al. (1978, p. 553) draws the conclusion that structure and the processes taking place inside the organization are closely aligned; it is hard to speak about one without mentioning the other. It is important to understand the conclusion drawn by Miles et al. (1978). It illustrates how the

In the early 1980s, Henry Mintzberg’s, constructed the organizational archetypes. In this model Mintzbeg introduces five types of organization structure and how they influence the functions of organizations. On the organizational model there are five categories which are: Entrepreneurial, Machine (Bureaucracy), Professional bureaucracy, The Divisional (Diversified), and Adhocracy. Entrepreneurial organization consists of one large unit with one or a few top managers. The organization is relatively unstructured and informal compared with other types of organization, and the lack of standardized systems allows the organization to be flexible.

2. Assume that an investor lends 100 shares of Jiffy, Inc. common stock to a short seller. The bid-ask prices are $32.00 - $32.50. When the position is closed the bid-ask prices are $32.50 - $33.00. The commission rate is 0.5%. The market interest rate is 5.0% and the short rebate rate is 3.0%. Calculate the gain or loss to the lender. Assume the lender is not subject to a bid-ask loss or commissions. (Points : 1)

Economic science teaches us that due to their subjective needs, individuals have subjective preferences, and hence different interest. Occasionally different subjective interests give rise to conflicts of interest between contracting partners. These conflicts of interest may result in turn, in one or both parties undertaking actions that may be against the interest of the other contracting partner. The primary reason for the divergence of objectives between managers and shareholders has been attributed to separation of ownership (shareholders) and control (management) in corporations. As a consequence, agency problems

Kessler, E. H. (Ed.) (2013). Encyclopedia of management theory (Vols. 1-2). Thousand Oaks, CA: SAGE Publications Ltd. doi: 10.4135/9781452276090

² (R. Duncan, Organizational dynamics (1979), W. Alan Randolf, Gregory G.Dess , Academy of Management Review (1984)

Proponents of the knowledge-based theory of the firm point out that this one sided concentration on incentive conflicts in the economics of organizational literature overlooks the production side of the firm. Langlois and Foss, for example, argue that the literature has unreflectively relied on a dichotomy between productive aspects and exchange aspects of the firm, that is, on a dichotomy between production costs and exchange costs. In analyzing exchange costs the literature recognizes that exchange itself is not costless, but involves transaction costs from imperfect knowledge and opportunism. But in analyzing production costs, there has been an embedded agreement that price theory tells us all we need to know about production. As Langlois and Foss point out, however, it is very likely that knowledge about how to produce is imperfect and that knowledge about how to link together one person’s (or organization’s) productive knowledge with that of another is imperfect. These twin issues of capabilities and coordination are discrete from the hazards of astringent that other traditional beliefs have focused on. Both knowledge resources and (imperfect) production costs can be said to vary depending on the attributes of a production process, in the same way that transaction costs differ depending on the asset attributes of investment projects. Thus, instead of holding technology constant across alternative modes of organization as a

Corporate management has evolved over the years becoming a complicated process even to the most refined managers. Classical management styles can no longer be relied upon to organize efficiently the several factors that come into play in the modern business world.