Organizations and Spontaneous Order in Mitigating Strategic Uncertainty

60 Pages Posted: 13 Oct 2017 Last revised: 28 Sep 2022

See all articles by Liang Dai

Liang Dai

The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)

Ming Yang

UCL

Date Written: September 27, 2022

Abstract

We find that Hayek's preference for spontaneous order over organizations as a source of social order may be reversed from the alternative perspective of mitigating individuals' uncertainty about the actions of others (i.e., strategic uncertainty) in coordination. Organizations mitigate strategic uncertainty among their members by obliging them to take collective actions. We find that when individuals' strategic complementarity dominates their preference heterogeneity, organizations further endogenously mitigate strategic uncertainty between their members and independent players and yield Pareto improvement, more so if they are larger. But organizations become unsustainable if they are so large that this mitigation is complete. This implies an upper limit for sustainable organizations. However, when individuals' preference heterogeneity dominates their strategic complementarity, we find that organizations are not desirable, since individuals face little strategic uncertainty even without them. They are also unsustainable due to the disfavor of collective actions. These results deepen our understanding of the government's role in coordinating economic activities with positive externalities, and the similar role of parties, social groups and labor unions in politics.

Keywords: strategic uncertainty, organization, spontaneous order

JEL Classification: P41, D02, D83

Suggested Citation

Dai, Liang and Yang, Ming, Organizations and Spontaneous Order in Mitigating Strategic Uncertainty (September 27, 2022). Available at SSRN: https://ssrn.com/abstract=3051192 or http://dx.doi.org/10.2139/ssrn.3051192

Liang Dai

The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)

Ming Yang (Contact Author)

UCL ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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