Summary: Chapter 4 Organizatioal Architecture

Read the summary and the most important questions on Chapter 4 Organizatioal architecture

• 1 Slide 1selfinterested behavior

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• What is the fundamental assumption of economics?

  Individuals act in their self interest to maximize their utility
  
  Oportunity set: work for employer, work on other projects, relax etc.
  resource constraints: time, money knowledge
  Utility: preferences for money, working conditions, leisure.

• Why do individuals form teams or firms?

  1. can produce more in team than when acting alone.
  2. generate a larger opportunity set. 

  
  
  A firm is a cooperation of individuals! 

• What is a disadvantage of team production?

  Agency problems = manager/agent pursuit their self interest instead of the principal (directeur).
  
  this brings along agency costs= decline in firm value resulting form agents persuing own interest to the detriment of the principal's interest.

• Free rider problem and solutions?

  Agents have incentives to shirk because their individual efforts are not directly observable.
  Solutions: Incentive contracts, monitoring, etc.

• Horizon problem and solution?

  Agents expecting to leave firm in near future place less weight
      on long-term consequences.
       Solutions: Incentive contracts, monitoring, etc.

• Employee theft and solution?

  Employees take firm resources for unauthorized purposes.
  Solutions: Buy fidelity bond, monitoring, inventory control, etc.

• 2 Agency asymmetry problems?

  • Hidden information-> adverse selection
  • Hidden action -> moral hazard

• 2 Organizational architecture

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• Importance of an appropriate organizational architecture?

  Three legged stool:
  

  1. Measure performance
  2. reward performance
  3. partition decision rights 
     

  
  
  all theree legs must bebalanced and coordinated. change one means changing an other

• 3 three legged stool

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• Design issues measure performance?

  - Determining relative weight for each measure
  - costs to collect and analyze measures
  - Internal accounting system provides some of these measures

• Design issues reward and punish performance?

  •  Linked to performance measures
    
  •  External job market
    
  •  Employment and tax law