Coordination of economic activity: An example
- 117 Downloads
In this paper we consider issues of organization of economic activity, especially coordination of productive activity. We begin with a classic question; “Which economic activities are (or should be) coordinated by markets, and which by other means?” “Other means” usually refers to administrative or bureaucratic mechanisms; sometimes the word “hierarchies” is used. This paper presents a formal model focused on productive activities, in which this question can be asked. The paper also presents an example — a specialization of the model — in which efficient coordination means just-in-time production. The example has two cases. In Case 1 it is shown that the market mechanism cannot achieve efficient coordination, even though there are market equilibria. There are alternative mechanisms, especially one called a direct mechanism, that does achieve efficient coordination. In Case 2 both types of mechanism achieve efficient coordination, but the market mechanism has higher informational costs. The two cases are the same except in one respect. Therefore the different outcomes in the two cases cannot be due to properties that are the same in both cases.
KeywordsCompetitive Market Production Unit Market Mechanism Coordination Mechanism Competitive Equilibrium
Unable to display preview. Download preview PDF.
- Debreu, G. (1959) Theory of Value. Wiley, New YorkGoogle Scholar
- Hurwicz, L. (1972) On Informationally Decentralized Systems. In: McGuire, C.B., Radner, R. (eds.) Decision and Organization. (Studies in Mathematical Economics and Managerial Economics.) North Holland Elsevier, New YorkGoogle Scholar
- Kranton, R., Minehart, D. (1999) Vertical Integration, Networks, and Markets. Preprint, University of MarylandGoogle Scholar
- Marschak, T., Reichelstein, S. (1995) Communication Requirements for Individual Agents in Networks and Hierarchies. In: Ledyard, J. (ed.) The Economics of Informational Decentralization: Complexity Efficiency and Stability. KluwerGoogle Scholar
- Marschak, T., Reichelstein, S. (1998) Network Mechanisms, Information Efficiency and Hierarchies. Journal of Economic Theory 106–141Google Scholar
- Mount, K., Reiter, S. (1990) A model of computing with human agents. CMSEMS Discussion Paper No. 890, JuneGoogle Scholar
- Mount, K., Reiter, S. (2001) Computational Complexity in Economic Behavior and Organiozation. Cambridge University Press, New YorkGoogle Scholar
- Reiter, S. (1995) Coordination and the structure of firms. CMSEMS Discussion Paper No. 1121Google Scholar