How Organizations Behave: Towards Implications for Economics and Economic Policy

This essay begins with introductions to the two sides of organizational economics: the economics of internal organization (which focuses on the internal structure and functioning of organizations) and the economic theory of the firm (which focuses on organizations’ boundaries and on relationships across these boundaries). Taken literally, these issues are only loosely related to the conference theme of “How Humans Behave,” but I do see a high-level parallel: both behavioral economics and organizational economics are investigating new approaches to modeling economic actors (individuals and firms, respectively). After these introductions to the two sides of organizational economics, I then try to connect “How Humans Behave” and “How Organizations Behave.” In particular, I offer quick observations (hoping to prompt longer discussions) about (a) applying behavioral models in organizational settings and (b) how organizational settings might warrant new behavioral models. Finally, in an attempt to connect to economic policy, I consider (c) what do organizations do, and whether it matters that these activities are conducted within organizations (rather than outside). * Written for the Federal Reserve Bank of Boston Economic Conference, “How Humans Behave: The Implications for Economics and Economic Policy” (June 8-10, 2003). Parts of this essay, especially Section 1, draw heavily on Gibbons (2003); other parts, especially Section 2, draw heavily on Gibbons (2001). How Organizations Behave: Towards Implications for Economics and Economic Policy