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Why organizations fail: models and cases

Garicano, Luis and Rayo, Luis (2016) Why organizations fail: models and cases. Journal of Economic Literature, 54 (1). pp. 137-192. ISSN 0022-0515

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Identification Number: 10.1257/jel.54.1.137


Organizations fail due to incentive problems (agents do not want to act in the organization's interests) and bounded rationality problems (agents do not have the necessary information to do so). This survey uses recent advances in organizational economics to illuminate organizational failures along these two dimensions. We combine reviews of the literature with simple models and case discussions. Specifically, we consider failures related to short-termism and the allocation of authority, both of which are instances of "multitasking problems"; communication failures in the presence of both soft and hard information due to incentive misalignments; resistance to change due to vested interests and rigid cultures; and failures related to the allocation of talent and miscommunication due to bounded rationality. We find that the organizational economics literature provides parsimonious explanations for a large range of economically significant failures.

Item Type: Article
Official URL:
Additional Information: © 2016 by the American Economic Association
Divisions: Management
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
JEL classification: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior
D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M10 - General
Date Deposited: 24 Mar 2016 17:32
Last Modified: 19 Jun 2024 18:57

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