The Economics of Organizational Design

Abstract

Which conditions must be fulfilled on the level of organizational decision making to construct a theory for bounded rationality in organizations? We propose an information processing model of an organization in which limits of decision making are generated by ‘overload’ such that the level of organizational performance decreases in probability. This is a cooperative model of organizations as compared to conflict theories of organizations where game theoretic tools apply. It is probably close to the Japanese stereotype of organization or team-like organizational forms, Marschak (1974), according to which harmony prevails and implementation and incentive aspects are not the major problem. We adopt a designer’s point of view, very much akin to engineering science, which mixes normative and descriptive elements of decision making. It is hoped that the model has practical implications.