Behavioral theory of the firm

10 important questions on Behavioral theory of the firm

Reminder: Standard Economic Theory’s model of Firms (3)


Firms’ actions are only determined by inputs/outputs prices, not by managers or employees


Firms are viewed as holistic entities, i.e.,
a single unified entity
everyone in the firm will work towards the same goal: profit maximization

Firms (as markets) are efficient mechanisms to transform inputs into outputs


Reminder: SET’s model of Organizational Decision making (4)


Firms (and individuals working within firms) enjoy perfect information and certainty about environmental outcomes


Firms can easily choose the optimal solution for each problemBy definition, this solution is the same for all firms

Firms have no individual strategy

Research question theory of behavior of firm:

how individuals behave in firm
can firms make decisions
what explains firm diversity
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1 What are firms? Behavioral theory

Firms are coalitions of several groups of participants, with their own characteristics, either inside or outside boundaries of firm

Participants input and output? nature of firm

Participants receive inducements in return for contribution to the organization 
(stay in firm as long as inducements > contribution)

2 Organizational goals: objectives in set and btf (3)

Set: profit maximization
BTF: each participant own subgoals that may conflict
established by continuous process of bargaining (negotiating finished in agreement) 
depends on contribution to firms and coalitions made.  
May change over time

3 Information available set btf

SET: participants know all alternatives, consequences and no cognitive constraints
BTF: not all the same info, different analysis, decisions 

4 organizational choice set btf (5)

SET: fully rational, complete knowledge, optimal solution
BTF: 
Cognitive constraints, 
only bounded rationality, 
make decisions on imcomplete, imprecise and ambiguous info, 
satisfying instead of maximum
expertise area: local search, path dependency

5 impact on structures set btf

SET: similar characteristics, similar constraints, same decision based on fully rational and complete info
BTF: Because of their bounded rationality, individuals select the first satisfying option identified through local search and path dependency

BTF implications on management of firm(4)

Firms are complex entities dealing with several contradictory objectives 
Individuals participating in firms are boundedly rational and can make suboptimal choices because of incomplete information
Firms tend generally to prefer managing more efficiently current operating procedures rather than to try out new ideas
This causes systematic and significant differences in performance among firms (heterogeneity) 

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