Being Efficiently Fickle: A Dynamic Theory of Organizational Choice

Abstract

A central proposition in organization theory is that discrete organizational forms are matched to environmental conditions, market strategies, or exchange conditions. This paper develops a contrary theoretical proposition. We argue that efficiency may dictate modulating between discrete governance modes (i.e., structural modulation) in response to a stable set of exchange conditions. If governance choices are discrete as much of organization theory argues, then the consequent steady-state functionality delivered by these organizational forms is itself discrete. However, if the desired functionality lies in between the steady-state functionality delivered by two discrete choices, then efficiency gains may be available by modulating between modes. We develop an analytical model of structural modulation and examine factors that influence when modulation is efficiency enhancing as well as the optimal rate of modulation. We conclude that, under certain conditions, structural modulation is efficiency enhancing. Further, contrary to theories that highlight the potentially destructive consequences of inertia on organizational survival, we identify important efficiency yielding benefits of inertia.

Keywords: organizational economics, organizational design, dynamics, organizational change, theory of the firm

JEL Classification: L22, L23, L14