Abstract
Although models with bounded rationality — defined broadly to mean those in which agent behaviour departs from the paradigm of effortless full rationality — are appearing in every field of economics, only in the theory of organizations has bounded rationality been an important theme throughout the history of the field. There is a reason for this difference. The classical model of rational choice has been a good approximation and powerful tool in studying consumer and producer theory, markets and price determination, imperfect competition, trading in financial markets, and most other topics in economics. Only recently have fields matured enough that some outstanding open questions require more accurate models of human decision-making. In the thoery of organizations, on the other hand, the rational model leads to uninteresting models of organizations, in which one manager or entrepreneur can run a firm or economy of arbitrary size. Without bounds on information processing capacity, it is impossible to explain the sharing of information processing tasks that is such an important part of the interaction between members of organizations, and to explain the existence and functioning of the administrative apparatus that are such important components of organizations (as documented for example by Chandler, 1966 and 1990).
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Abselon, H. (1980) ‘Lower Bounds on Information Transfer in Distributed Computations’. Journal of the ACM, vol. 27, pp. 384–92.
Aghion, P. and J. Tirole (1995) ‘Formal and Real Authority in Organizations’, Nuffield College, Oxford and IDEI, Toulouse (mimeo).
Aoki, M. (1986) ‘Horizontal vs. Vertical Information Structure of the Firm’, American Economic Review, vol. 76, pp. 971–83.
Arrow, K. J., and L. Hurwicz (1960) ‘Decentralization and Computation in Resource Allocation’, in Pfouts, R. W. (ed.), Essays in Economics and Econometrics (Chapel Hill: University of North Carolina Press) pp. 34–104.
Arrow, K. J. and L. Hurwicz (eds) (1977) Studies in Resource Allocation (Cambridge: Cambridge University Press).
Arrow, K. J., L. Hurwicz and H. Uzawa (eds) (1958) Studies in Linear and Nonlinear Programming (Stanford, CA.: Stanford University Press).
Arrow, K. J. and R. Radner (1979) ‘Allocation of Resources in Large Teams’, Econometrica, vol. 47, pp. 361–85.
Baliga, S. and T. Sjöström (1998) ‘Decentralization and Collusion’, MEDS, Northwestern University and Department of Economics, Penn State University; forthcoming in Journal of Economic Theory.
Barone, E. (1935) ‘The Ministry of Production in the Collectivist State’, in Hayek, F. A. V. (ed.), Collectivist Economic Planning (London: George Routledge and Sons), pp. 245–90.
Baumol, W. J. and T. Fabian (1964) ‘Decomposition, Pricing for Decentralization and External Economies’, Management Science, vol. 11, pp. 1–32.
Beckmann, M. (1958) ‘Decision and Team Problems in Airline Reservations’, Econometrica, vol. 26, pp. 134–45.
Beggs, A. W. (1995) ‘Queues and Hierarchies’, Wadham College, Oxford University (mimeo).
Binmore, K. and L. Samuelson (1992) ‘Evolutionary Stability in Repeated Games Played by Finite Automata’, Journal of Economic Theory, vol. 57, pp. 278–305.
Bolton, P. and M. Dewatripont (1994) ‘The Firm as a Communication Network’, Quarterly Journal of Economics, vol. 109, pp. 809–39.
Burton, R. M. and B. Obel (1984) Designing Efficient Organizations: Modelling and Experimentation (Amsterdam: North-Holland).
Carley, K. (1995) ‘Computational and Mathematical Organization Theory: Perspective and Directions’, Computational and Mathematical Organization Theory, vol. 1, pp. 39–56.
Carley, K. M. and M. J. Prietula (eds) (1994) Computational Organization Theory (Hillsdale, N.J.: Lawrence Erlbaum Associates).
Chanoles, A.D. (1966) Strategy and Structure (New York: Doubleday).
Chandler, A. D. (1990) Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, M.A.: Harvard University Press).
Chang, M.-H. and J. E. Harrington (1996) ‘Organizational Structure and Firm Innovation’, Cleveland State University and Johns Hopkins University (mimeo).
Cheng, J. Q. and M. P. Wellman (1996) ‘The WALRAS Algorithm: A Convergent Distributed Implementation of General Equilibrium Outcomes’, AI Laboratory, University of Michigan (mimeo).
Coase, R. (1937) ‘The Nature of the Firm’, Economica, vol. 4, pp. 386–405.
Cremer, J. (1980) ‘A Partial Theory of the Optimal Organization’, The Bell Journal of Economics, vol. 11, pp. 683–93.
Dantzig, G. B. and P. Wolfe (1960) ‘Decomposition Principles for Linear Programs’, Operations Research, 8, vol. pp. 101–11.
Dickinson, H. D. (1939) Economics of Socialism (Oxford: Oxford University Press).
Dirickx, Y. M. I. and L. P. Jennergren (1979) Systems Analysis by Multilevel Methods (Chichester, England: John Wiley & Sons).
Friedman, E. J. and S. S. Oren (1995) ‘The Complexity of Resource Allocation and Price Mechanisms under Bounded Rationality’, Economic Theory, vol. 6, pp. 225–50.
Fudenberg, D. and J. Tirole (1991) Game Theory (Cambridge, M.A.: MIT Press).
Galbraith, J. (1977) Organization Design (Reading, M.A.: Addison-Wesley).
Geanakoplos, J. and P. Milgrom (1991) ‘A Theory of Hierarchies Based on Limited Managerial Attention’, Journal of the Japanese and International Economies, vol. 5, pp. 205–25.
Gibbons, A. and W. Rytter (1988) Efficient Parallel Algorithms (Cambridge: Cambridge University Press).
Green, J. and J.-J. Laffont (1986) ‘Alternative Limited Communication Systems’, in Heller, W., R. Starr and D. Starett (eds), Uncertainty, Information and Communication (Essays in Honour of K. J. Arrow, vol. 3 (Cambridge: Cambridge University Press).
Green, J. and J.-J. Laffont, (1987) ‘Limited Communication and Incentive Constraints’, in Groves, T., R. Radner and S. Reiter (eds), Information, Incentives, and Economic Mechanisms (Minneapolis: University of Minnesota Press).
Groves, T. (1983) ‘The Usefulness of Demand Forecasts for Team Resource Allocation in a Dynamic Environment’, Review of Economic Studies, vol. 50, pp. 555–71.
Groves, T. and R. Radner (1972) ‘Allocation of Resources in Teams’, Journal of Economic Theory, vol. 4, pp. 415–41.
Hart, O. (1995) Firms, Contracts and Financial Structure (Oxford: Oxford University Press).
Hayek, F. A. von (1935) ‘The Nature and History of the Problem’, in Hayek, F. A. von (ed.), Collectivist Economic Planning, ch. 1 (London: George Routledge & Sons).
Hayek, F. A. von (1940) ‘Socialist Calculation: The Competitive “Solution”’, Economica, vol. 7, pp. 125–49.
Heal, G. M. (1973) The Theory of Economic Planning (Amsterdam: North-Holland).
Heal, G. (1986) ‘Planning’, in Arrow, K. J. and M. D. Intriligator (eds), Handbook of Mathematical Economics, vol. III, ch. 29 (Amsterdam: North Holland).
Hong, L. and S. Page (1994) ‘Reducing Informational Costs in Endowment Mechanisms’, Economic Design, vol. 1, pp. 103–17.
Hong, L. and S. Page (1995) ‘Computation by Teams of Heterogeneous Agents’, Syracuse University and California Institute of Technology (mimeo).
Huberman, B. A. (1996) ‘Computation as Economics’, Dynamics of Computation Group, Xerox Palo Alto Research Center, C.A.
Hurwicz, L. (1960) ‘Optimality and Informational Efficiency in Resource Allocation Processes’, in Arrow, K. J., S. Karlin and P. Suppes (eds) Mathematical Methods in the Social Sciences (Stanford, C.A.: Stanford University Press).
Hurwicz, L. (1972) ‘On Informationally Decentralized Systems’, in McGuire, C. B. and R. Radner (eds), Decision and Organization (Amsterdam: North-Holland), 2nd edn (1986) (Mineapolis: University of Minnesota Press).
Hurwicz, L. (1977) ‘On the Dimensionality Requirements of Informationally Decentralized Pareto-satisfactory Processes’, in Arrow, K. J. and L. Hurwicz (eds), Studies in Resource Allocation Processes (Cambridge: Cambridge University Press).
Hurwicz, L. (1986) ‘On Informational Decentralization and Efficiency in Resource Allocation Mechanisms’, in Reiter S. (ed.), Studies in Mathematical Economics, vol. 25 (Providence, R.I. The Mathematical Association of America).
Ibaraki, T. and N. Katoh (1988) Resource Allocation Problems: Algorithmic Approaches (Boston: MIT Press).
Jordan, J. (1987) ‘The Informational Requirements of Local Stability in Decentralized Allocation Mechanisms’, in Groves, T., R. Radner and S. Reiter (eds), Information, Incentives and Economic Mechanisms (Minneapolis: University of Minnesota Press).
Jordan, J. (1995) ‘Classification Dynamics in the Theory of Decisions and Organizations, University of Minneapolis (mimeo).
Kaldor, N. (1934) ‘The Equilibrium of the Firm’, Economic Journal, vol. 44, pp. 70–1.
Keren, M. and D. Levhari (1979) ‘The Optimum Span of Control in a Pure Hierarchy’, Management Science, vol. 11, pp. 1162–72.
Keren, M. and D. Levhari (1983) ‘The Internal Organization of the Firm and the Shape of Average Costs’, Bell Journal of Economics, vol. 14, pp. 74–86.
Kushilevitz, E. and N. Nisan (1997) Communication Complexity (Cambridge: Cambridge University Press).
Laffont, J.-J. and D. Martimort (1996) ‘Collusion and Delegation’, IDEI, Université de Toulouse I (mimeo).
Lange, O. (1936) ‘On the Economic Theory of Socialism: Part One’, Review of Economic Studies, vol. 4, pp. 53–71.
Lange, O. (1937) ‘On the Economic Theory of Socialism: Part Two’, Review of Economic Studies, vol. 4, pp. 123–42.
Lee, J. and E. H. Durfee (1995) ‘A Microeconomic Approach to Intelligent Resource Sharing in Multiagent Systems’, Technical Report CSE-TR-234-95, AI Laboratory, University of Michigan.
Li, H. (1997) ‘Hierarchies and Information Processing Organizations’, University of Chicago (mimeo).
Malone, T. W. (1987) ‘Modeling Coordination in Organizations and Markets’, Management Science, vol. 33, pp. 1317–32.
Malone, T. W. and S. A. Smith (1988) ‘Modeling the Performance of Organizational Structures’, Operations Research, vol. 36, pp. 421–36.
March, J. G. and H. A. Simon (1958) Organizations (New York: John Wiley).
Marschak, J. (1955) ‘Elements for a Theory of Teams’, Management Science, vol. 1, pp. 127–37.
Marschak, T. (1972) ‘Computation in Organizations: The Comparison of Price Mechanisms and Other Adjustment Processes’, in McGuire, C. B. and Radner, R. (eds), Decision and Organization, ch. 10, pp. 237–81 (Amsterdam: North-Holland) and 2nd edn (1986) (Minneapolis: University of Minnesota Press).
Marschak, T. (1986) ‘Organizational design’, in Arrow, K. J. and M. D. Intriligator (eds), Handbook of Mathematical Economics, vol. III ch. 27, pp. 1358–440 (Amsterdam: Elsevier Science Publishers).
Marschak, J. and R. Radner (1972) Economic Theory of Teams (New Haven: Yale University Press).
Marschak, T. and S. Reichelstein (1995) ‘Communication Requirements for Individual Agents in Networks and Hierarchies’, in Ledyard J. (ed.), The Economics of Informational Decentralization: Complexity, Efficiency and Stability (Boston: Kluwer Academic Publishers).
Marschak, T. and S. Reichelstein (1998) ‘Network Mechanisms, Informational Efficiency, and Hierarchies’, Journal of Economic Theory, vol. 79, pp. 106–41.
McAfee, R. P. and J. McMillan (1995) ‘Organizational Diseconomies of Scale’, University of Texas, Austin, and University of California, San Diego (mimeo).
Meagher, K. J. (1996) ‘How to Chase the Market: An Organizational and Computational Problem in Decision Making’, Australian National University, Canberra (mimeo).
Melumad, N., D. Mookherjee and S. Reichelstein (1997) ‘Contract Complexity, Incentives and the Value of Delegation’, Journal of Economics and Management Strategy, vol. 6.
Mesarovic, M. D. and Y. Takahara (1989) Abstract Systems Theory (Berlin: Springer-Verlag).
Miller, J. (1996) ‘Evolving Information Processing Organizations’, Carnegie Mellon University.
Mises, L. V. (1951) Socialism: An Economic and Sociological Analysis (New Haven: Yale University Press), originally published as Die Gemeinwirtschaft in 1922.
Mookherjee, D. and S. Reichelstein (1995) ‘Incentives and Coordination in Hierarchies’, Boston University and Haas School of Business, UC Berkeley (mimeo).
Mookherjee, D. and S. Reichelstein (1996) ‘Budgeting and Hierarchical Control’, Boston University and Haas School of Business, UC Berkeley (mimeo).
Moore, J. C., H. R. Rao and A. B. Whinston, (1996) ‘Information Processing for Finite Resource Allocation Mechanisms’, Economic Theory, vol. 8, pp. 267–90.
Mount, K. and S. Reiter (1974) ‘The Informational Size of the Message Space’, Journal of Economic Theory, vol. 8, pp. 161–92.
Mount, K. and S. Reiter (1977) ‘Economic Environments for which there are Pareto Satisfactory Mechanisms’, Econometrica, vol. 45, pp. 821–42.
Mount, K. and S. Reiter (1987) ‘The Existence of a Locally Stable Dynamic Process with a Statically Minimal Message Space’, in Groves, T., R. Radner and S. Reiter (eds), Information, Incentives, and Economic Mechanisms (Minneapolis: University of Minnesota Press).
Mount, K. and S. Reiter (1990) ‘A Model of Computing with Human Agents’, The Center for Mathematical Studies in Economics and Management Science, Discussion Paper no. 890, Northwestern University, Evanston, Illinois.
Nemirovsky, A. S. and D. B. Yudin (1983) Problem Complexity and Method Efficiency in Optimization (New York: Wiley).
Orbay, H. (1996) ‘Essays on Transaction Costs and Organizations’, PhD dissertation, Stanford University.
Osborne, M. and A. Rubinstein (1994) A Course in Game Theory (Cambridge, M.A.: MIT Press).
Pareto, V. (1927) Manuel d’Economie Politique (Paris: Marcel Girard).
Radner, R. (1962) ‘Team Decision Problems’, Annals of Mathematical Statistics, vol. 33, pp. 857–81.
Radner, R. (1972) ‘Allocation of a Scarce Resource under Uncertainty: An Example of a Team’, in McGuire, C. B. and R. Radner (eds), Decision and Organization ch. 11, pp. 217–36 (Amsterdam: North-Holland) 2nd edn (1986) (Mineapolis: University of Minnesota Press).
Radner, R. (1993) ‘The Organization of Decentralized Information Processing’, Econometrica, vol. 62, pp. 1109–46.
Radner, R. and T. Van Zandt (1992) ‘Information Processing in Firms and Returns to Scale’, Annales d’Economie et de Statistique, vols 25/26, pp. 265–98.
Reichelstein, S. and S. Reiter (1988) ‘Game Forms with Minimal Message Spaces’, Econometrica, vol. 56, pp. 661–700.
Reiter, S. (1977) ‘Information and Performance in the (New)2 Welfare Economics’, American Economic Review: Paper and Proceedings, vol. 77, pp. 226–34.
Reiter, S. (1996) ‘Coordination and the Structure of Firms’, Northwestern University (mimeo).
Reiter, S. and C. Simon (1992) ‘A Decentralized Dynamic Process for Finding Equilibrium’, Journal of Economic Theory, vol. 56, pp. 400–25.
Roberts, J. (1987) ‘Information, Incentives and Iterative Planning’, in Groves, T., R. Radner and S. Reiter (eds), Information, Incentives and Economic Mechanisms (Minneapolis: University of Minnesota Press).
Robinson, A. (1934) ‘The Problem of Management and the Size of Firms’, Economic Journal, vol. 44, pp. 240–54.
Robinson, E. A. G. (1958) The Structure of Competitive Industry (Chicago: University of Chicago Press).
Rogers, D. F., R. D. Plante, R. T. Wong and J. R. Evans (1991) ‘Aggregation and Disaggregation Techniques and Methodology in Optimization’, Operations Research, vol. 39, pp. 553–82.
Sandholm, T. and V. R. Lesser (1995) ‘Equilibrium Analysis of the Possibilities of Unenforced Exchanged in Multiagent Systems’, in Proceedings, 14th International Joint Conference on Artificial Intelligence, Montreal.
Segal, I. (1996) ‘Communication Complexity and Coordination by Authority’, Department of Economics, University of California, Berkeley (mimeo).
Sethi, S. P. and Q. Zhang (1994) Hierarchical Decision Making in Stochastic Manufacturing Systems (Boston: Birkhäuser Boston).
Shannon, C. E. (1948) ‘A Mathematical Theory of Communication’, Bell System Technical Journal, pp. 27, 379–423, 623–56.
Simon, H. A. (1976) Administrative Behavior: A Study of Decision-Making Processes in Administrative Organizations (New York: Free Press).
Taylor, F. M. (1929) ‘The Guidance of Production in the Socialist State’, American Economic Review, vol. 19.
Tesfatsion, L. (1997) ‘How Economists Can Get a Life’, in Arthur, W. B., S. Durlauf and D. Lane (eds), The Economy as an Evolving Complex System, II (Menlo-Park, C. A.: Addison-Wesley).
Van Alstyne, M. (1997) ‘The State of Network Organization: A survey in Three Frameworks’, Journal of Organizational Computing and Electronic Commerce, vol. 7, pp. 83–152.
Van de Panne, C. (1991) ‘Decentralization for Multidivision Enterprises’, Operations Research, vol. 39, pp. 786–97.
Van Zandt, T. (1997a) ‘Real-time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents’, Review of Economic Studies (forthcoming).
Van Zandt, T. (1997b) ‘Real-time Hierarchical Resource Allocation’, Princeton University (mimeo).
Van Zandt, T. (1997c) ‘Real-time Hierarchical Resource Allocation with Quadratic Costs’, Princeton University (mimeo).
Van Zandt, T. (1997d) ‘The Scheduling and Organization of Periodic Associative Computation: I Essential Networks, II Efficient Networks’, Economic Design, vol. 3, pp. 15–27 and 93–127.
Van Zandt, T. (1997e) ‘Structure and Returns to Scale of Real-time Hierarchical Resource Allocation’, Princeton University (mimeo).
Van Zandt, T. and R. Radner (1997) ‘Real-time Decentralized Information Processing and Returns to Scale’, Princeton University and New York University (mimeo).
Waldspurger, C. A., T. Hogg, B. A. Huberman, J. O. Kephart and W. S. Stornetta (1992) ‘Spawn: A Distributed Computational Economy’, IEEE Transactions on Software Engineering, vol. 18, pp. 103–17.
Walras, L. (1954) Elements of Pure Economics, trans. W. Jaffé (London: George Allen & Unwin).
Williams, S. R. (1986) ‘Realization and Nash Implementation: Two Aspects of Mechanism Design’, Econometrica, vol. 54, pp. 139–51.
Williamson, O. E. (1975) Markets and Hierarchies, Analysis and Antitrust Implications (New York: Free Press).
Williamson, O. E. (1985) The Economic Institutions of Capitalism (New York: Free Press).
Yao, A. C. (1979) ‘Some Complexity Questions Related to Distributive Computing’, in Proceedings of the 11th ACM Symposium on Theory of Computing, pp. 209–213.
Youssefmir, M. and B. A. Huberman (1995) ‘Clustered Volatility in Multiagent Dynamics’, Dynamics of Computation Group, Xerox Palo Alto Research Center (mimeo).
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Copyright information
© 1999 International Economic Association
About this chapter
Cite this chapter
Van Zandt, T. (1999). Decentralized Information Processing in the Theory of Organizations. In: Sertel, M.R. (eds) Contemporary Economic Issues. International Economic Association Series. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-14540-9_7
Download citation
DOI: https://doi.org/10.1007/978-1-349-14540-9_7
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-14542-3
Online ISBN: 978-1-349-14540-9
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)