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Organisational Economics

Organisational economics is the study of how economic principles and theories apply to the internal structures, decision-making processes, and incentives within an organization. It examines how firms allocate resources, design incentives, and manage contracts to achieve efficiency and profitability. Organisational economics focuses on issues like agency theory, transaction costs, and the boundaries of a firm, helping managers understand how to structure businesses for optimal performance.

Example

A company restructures its internal decision-making process based on principles from organisational economics to reduce transaction costs and improve communication between departments.

Key points

• Studies how economic theories apply to organizational structures and decision-making.

• Focuses on resource allocation, incentive design, and contract management.

• Addresses issues like agency theory and transaction costs to improve firm efficiency.

Quick Answers to Curious Questions

By applying economic theories, it helps firms design better incentive structures, allocate resources effectively, and reduce transaction costs.

Agency theory examines the relationship between principals (owners) and agents (managers), focusing on aligning their incentives to reduce conflicts of interest.

Transaction costs, such as negotiation and enforcement costs, can impact a firm’s efficiency, and reducing these costs improves profitability.