Abstract

http://ssrn.com/abstract=6658
 
 

References (26)



 
 

Citations (158)



 
 

Footnotes (18)



 


 



Specific and General Knowledge and Organizational Structure


Michael C. Jensen


Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

William H. Meckling


Simon School, University of Rochester (Deceased)

1992

Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998
CONTRACT ECONOMICS, pp. 251-274, Lars Werin and Hans Wijkander, eds., Blackwell, Oxford, 1992
Journal Of Applied Corporate Finance, Vol. 8, No. 2, Summer 1995

Abstract:     
This paper analyzes the relations between knowledge, control and organizational structure both in the market system as a whole and in private organizations. Limitations on the mental capacity of the human mind and the costs of producing and transferring knowledge means that knowledge relevant to all decisions can never be collected in the mind of a single individual or a small body of experts. This means that if the knowledge valuable to a particular decision is to be used in making that decision, there must be a system for partitioning out decision rights to individuals who already have the relevant knowledge and abilities or who can acquire or produce them at the lowest cost. Self interest on the part of individual decision-makers means a control system is required to motivate individuals with the decision rights and the relevant knowledge to use those decision rights appropriately. This control problem is solved in a capitalist economy by a system of alienable property rights.

Alienable rights cannot generally solve the control problem in firms, and the assignment of decision rights in firms does not generally include the assignment of alienability. Indeed, this is one of the major distinctions between firms and markets. The inalienability of rights within an organization means control problems must be solved by alternative means. Organizations solve these problems by establishing what we define to be the Organizational Rules of the Game that provide:

(1) a system for partitioning decision rights out to agents in the organization,
(2) a performance measurement and evaluation system, and
(3) a reward and punishment system

The inherent inefficiency of organizational control systems as compared to alienability means firms cannot survive unless they provide other offsetting advantages such as economies of scale, scope or riskbearing.

Note: Sadly, Dr. Meckling, Dean Emeritus of the Simon School, died in May 1998.

Number of Pages in PDF File: 33

JEL Classification: D23, D82, D83

Accepted Paper Series


Download This Paper

Date posted: September 1, 1995 ; Last revised: January 17, 2011

Suggested Citation

Jensen, Michael C. and Meckling, William H., Specific and General Knowledge and Organizational Structure (1992). Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998; Journal Of Applied Corporate Finance, Vol. 8, No. 2, Summer 1995. Available at SSRN: http://ssrn.com/abstract=6658 or http://dx.doi.org/10.2139/ssrn.6658

Contact Information

Michael C. Jensen (Contact Author)
Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484
Social Science Electronic Publishing (SSEP), Inc. ( email )
7858 Sanderling Road
Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
William H. Meckling
Simon School, University of Rochester (Deceased)
Feedback to SSRN


Paper statistics
Abstract Views: 47,065
Downloads: 10,583
Download Rank: 168
References:  26
Citations:  158
Footnotes:  18

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.390 seconds