Incentives, Information, and Organizational Design

49 Pages Posted: 26 May 2004 Last revised: 3 Mar 2015

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: May 1989

Abstract

This paper explores the interaction between incentives, information, and organizational design. It argues that the virtues of the market economy do not lie so much in the vision of competition and decentralization embodied in the Arrow-Debreu model, or the Lange-Lerner-Taylor analysis of market socialism, as they do in those more recent models analyzing competition as contests (Nalebuff-Stiglitz, Lazear-Rosen) and decentralization as a structure of decision making, in environments in which imperfect information is dispersed among numerous individuals (humans are fallible) and accordingly, some method of aggregation has to be found. While the traditional model exaggerates the virtues of the market (whenever markets are incomplete and information is imperfect, market allocations are almost never constrained Pareto efficient), it also understates its virtues: its ability to solve the problems of selection, incentives, and information gathering and aggregation which are the care problems in organizational design. The paper shows how this alternative perspective provides insights into the role that time plays in resource allocation- -for example, patent (R & D) races as well races to be the first to enter a market. We are able to provide an explanation, for instance, for why in times of economic crisis (such as wars) most economies abandon reliance on market mechanisms.

Suggested Citation

Stiglitz, Joseph E., Incentives, Information, and Organizational Design (May 1989). NBER Working Paper No. w2979. Available at SSRN: https://ssrn.com/abstract=227218

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