Why Organizations Fail: Models and Cases

79 Pages Posted: 10 Feb 2015

See all articles by Luis Garicano

Luis Garicano

Centre for Economic Policy Research (CEPR); IE Business School

Luis Rayo

University of Chicago - Booth School of Business

Date Written: February 2015

Abstract

Organizations fail due to incentive problems (agents do not want to act in the organization's interests) and bounded rationality problems (agents do not have the necessary information to do so). This survey uses recent advances in organizational economics to illuminate organizational failures along these two dimensions. We combine reviews of the literature with simple models and case discussions. Specifically, we consider failures related to the allocation of authority and short-termism, both of which are instances of 'multitasking problems'; communication failures in the presence of both soft and hard information due to incentive misalignments; resistance to change due to vested interests and rigid cultures; and failures related to the allocation of talent and miscommunication due to bounded rationality. We find that the organizational economics literature provides parsimonious explanations for a large range of economically significant failures.

Keywords: organizational economics

JEL Classification: D21, D86, J33, L23, M52

Suggested Citation

Garicano, Luis and Garicano, Luis and Rayo, Luis, Why Organizations Fail: Models and Cases (February 2015). CEPR Discussion Paper No. DP10395, Available at SSRN: https://ssrn.com/abstract=2562920

Luis Garicano (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IE Business School ( email )

Calle María de Molina, 11
Madrid, 28006
Spain

Luis Rayo

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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