Structure Constrains Growth Bounded Rational Research Paper

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404). They found that complexity especially in hierarchical organizations strongly determines success of design choice outcomes, especially when endogenous adaptation in different modules delivers "local performance improvement" (Ethiraj and Levinthal, 2004, p. 404). This is based on H.A. Simon's 1962 model of organizations, products and technology as complex, evolving systems where some choices constrain decision-making in the lowest levels, and also "near-decomposability" (Ethiraj & Levinthal, 2004, p. 404), the argument that intermodular interaction becomes clustered over time between "isolated subsets of interactions" (Ethiraj & Levinthal, 2004, p. 404). Specific units interact more than others, i.e. partnering is not uniform across all departments.

Thus arise multiple, unique interactions within the complex firm that allows for complex evolution (Simon, 1962, ctd. In Ethiraj & Levinthal, 2004, p. 404). This becomes problematic to predict, as an empirical phenomenon that develops organically. Numerous researchers had described possible designs of various complexity, but choosing which one to implement was the problem Ethiraj & Levinthal discovered in the literature in 2004. They then asked if this was complicated by overlooking "important systems in the world that are complex without being hierarchic," which "may to a considerable extent escape our observation and our understanding" (Ethiraj & Levinthal, 2004, p. 404). Not only is there a problem selecting firm design before the fact from the familiar portfolio of alternatives. Simon (1962) took this one step further to ask if this is because those are all we perceive and there may be other forms available that are just too complex for us to observe (ctd. In Ethiraj & Levinthal, 2004, p. 404). Thus arises a meta-analytic epistemological problem questioning how we know what we can know, when the optimal may be outside our tool box because modeling is too difficult. Not only do different structures work in the same environments differently, environments differ and the choices we have may not be the best alternative: Hierarchical options may not be the best. What then is the best choice of structure? We don't, and to some degree can not, know.

Nickerson and Zenger (2002) challenged all those various models by demonstrating how "structural modulation" between "discrete governance modes" (p. 1) may maximize efficiency even when other factors are held constant, i.e. At what is often considered the final, steady state of maximum growth. This state inertia may itself deliver performance benefits in other cases, and Nickerson and Zenger (2002) differentiated the two. Sometimes it pays to vacillate between governance mode even with all else held equal and sometimes remaining the same is more strategic. This all entails the question of exactly what is the firm, which in fact sheds light on why there are still so many competing explanations.

What is 'the' firm, then?

Rajan and Zingales (2001) provided their contribution in a relatively direct explanation of hierarchy choice at start up, starting in a two-period model, which they then extended to the long-run "steady state equilibrium" where "the state...[i.e. The limit to growth] is repeated every period" (Rajan & Zingales) but they kept risk neutral with a linear production function because "technological limits to firm size" was not their focus (Rajan & Zingales, year, p. 812). This maximum firm size depended on the strength of private property rights, where vertical articulation cannot develop if competition is high from information leakage. Ultimately this is highly indeterminate because of environmental factors like property rights correlating with higher incomes (Rajan & Zingales, 2001, p. 831). Therefore countries with stronger judiciaries end up with larger firms, some have found (Rajan and Zingales, 2001, p. 832), especially where based on intangible assets subject to appropriation. Their second model has horizontal primary managers not cross-specialized so no expropriation can occur and thus the entrepreneur is protected from competition. This all begins all over once the entrepreneur retires; the only way the departing entrepreneur can retain control of the asset is to convert from horizontal to vertical anyway (Rajan & Zingales, 2001, p. 838).

This is not a new problem

But as many critics have argued, neoclassical price theory provides no rationale for the very existence of the firm, not to speak of its boundaries and internal organization. This is not just a matter of the price system operating so efficiently that there is no need for, say, any vertically integrated (hierarchical) enterprises; it is more fundamentally a matter of neoclassical perfect competition theory being inherently incapable of rationalizing anything called "the firm."

Foss, 1994, p. 34

Foss (1994) went on to outline the 'nexus-of-contracts' view, which sees the firm as organized to compensate for the moral hazard to shirk, an information asymmetry problem, by centralizing information into a central agent in order to prevent such cost avoidance (shirking) by monitoring contracted parties and owning residual assets (profit), which confers an interest to police counterparty performance (p. 36). This has been modified over time but leaves no room for entrepreneurial planning and direction, where all risk reduced to price change. Under this view, Foss calls the 'firm' just a more articulated bundle of market agreements "only distinguished from ordinary spot market contracts by the continuity of association among input owners" (37).

This contrasted with the "Asset Specificity Approach" (Foss, 1994, p. 37), a rent derived from the synergy where employing complementary assets delivers higher performance than would its' opportunity cost, i.e. complementarity between factors of production. "The tussle for rents in bilateral monopoly situations characterized by asset specificity, opportunism, and bounded rationality," Foss (1994) explained, "is the driving force behind firms' changing boundaries. It is, in other words, costly bargaining games that underlie the existence of the firm and its efficient boundaries" (p. 37). Monopolists battle for limited markets at the margin between them and adapt to overcome competition through opportunism derived from complementarity.

Both of these interpretations fail to account for various internal costs of different organizational options, which Foss (1994) called "one of the really recalcitrant problems in modern debates on economic organization" (p. 37), which suggest the entire market should eventually congeal into one colossal firm, where merger always outperforms competition, which had then as now failed to materialize. The result was a hung jury as far as costs and incentives to particular choice of organizational governance beyond principal and agent (Foss, 1994, p. 38). Ultimately the reason firms exist at all is asymmetric information, since competition depends on "knowledge dispersion" or else without opportunism and synergy from team production, which require bureaocracy, there would be no transaction costs and so there would be no pressure for organizing market activity into any particular configuration at all (Foss, 1994, p. 38). Foss (1994, p. 38) concluded most current theories of the firm derive from Coase (1960) via Demsetz (1969). Ultimately, the "candidates for explanation are many and very different," as far as theories of the firm were concerned when Foss wrote (1994, p. 48). While nearly two decades have passed since Foss' assessment, the continuing lack of consensus reviewed above indicates that while trends emerge, "The" single, unified theory remains to be agreed upon.

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Foss, N.J. (1994). The theory of the firm: The Austrians as precursors and critics of contemporary theory. The review of Austrian Economics 7(1), 31-65. Retrieved from mises.org/journals/rae/pdf/RAE7_1_2.pdf

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