The Handbook of Organizational Economics

Knight (1921) saw the function of entrepreneurs (and others “of higher skill”) as making informed decisions in a world of uncertainty. Indeed, this would describe also the role of middle and low-level managers, their assistants, and the technicians who collectively manage a large organization through decentralized decision processes. This chapter reviews some research in economics on such managerial decision processes. Such research is not a mere technological exercise, akin to studying production on an assembly line. Rather, organizational processes are integral to the external interaction between an organization and other actors and to the internal functioning of the organization. Externally, these organizational processes constitute the decision making by organizations, which is of inherent interest to economists, for whom organizations are among the actors in broader economic models. Internally, such coordination processes are what define organizations—what make organizations organized—and the division of decision making tasks and the flows of information among members of an organization are what define organizational structure.