Foundations of Organizational Design

Abstract

The firm is a prime example in the economic literature of an organizational design. Since Smith ([1776] 1937) explained, with his well-known example of the pin factory, the merits of specialization in increasing efficiency and welfare, the profit-orientated firm as a fundamentally different way to arrange economic activities compared to markets has led many researchers to investigate the phenomenon of the firm and the different organizational forms it can take. Often, these investigations were analytical in nature, modelling the existence and functioning of firms, and assuming certain shortcomings and failures that do not allow markets to perform properly. Often, these investigations were also narrow in so far as the basic assumptions as to why firms exist — such as the purpose of a firm being to make a profit for its owners - have been made implicitly.