What is Organizational Economics?
302 reads · Last updated: December 5, 2024
Organizational economics is a branch of applied economics and New Institutional Economics that studies the transactions occurring within individual firms, as opposed to the transactions that occur within the greater market. Organizational economists study how economic incentives, institutional characteristics, and transaction costs influence the choices made within firms and the structure and market performance of firms.Organizational economics can include theories from several different streams of economic thought. These include agency theory, transaction cost economics, contract or property rights theory, theories of the firm, strategic management studies, and theories of entrepreneurship. Theory and research in organizational economics often incorporate insights, concepts, and methods from disciplines other than economics, too, including psychology and sociology. Courses in organizational economics are usually taught at the graduate or doctoral level.
Definition
Organizational economics is a branch of applied economics and new institutional economics that focuses on transactions occurring within individual companies rather than in larger markets. It examines how economic incentives, institutional features, and transaction costs influence choices within companies, as well as the structure and market performance of firms.
Origin
Organizational economics originated in the mid-20th century as interest in the internal mechanisms of companies grew. It integrates various economic theories, including agency theory and transaction cost economics, and incorporates insights from psychology and sociology.
Categories and Features
Organizational economics encompasses several theoretical streams, such as agency theory, which focuses on the relationship between managers and shareholders, transaction cost economics, which studies the costs of transactions within firms, and contract theory, which explores the role of contracts within companies. These theories help understand how firms optimize performance through internal structures.
Case Studies
A typical case is General Electric (GE), which improved efficiency through internal incentive mechanisms and organizational restructuring. Another example is Toyota, which enhanced market competitiveness by reducing internal transaction costs through lean manufacturing.
Common Issues
Investors often misunderstand that organizational economics applies only to large enterprises, whereas small and medium-sized businesses can also benefit from optimizing internal structures. Additionally, neglecting psychological and sociological factors can lead to a one-sided understanding of internal company operations.
