What is organizational economics?
Organizational economics is a branch of applied economics that studies the transactions that occur within individual companies, as opposed to the transactions that occur in the large market. Organizational economics is divided into three main sub-areas: agency theory, transaction cost economics and property rights theory. Organizational economics courses are generally given at university or doctoral level.
Key points to remember
- Organizational economics is used to study transactions within individual companies and determine the management approach to resource management.
- It breaks down into three main themes: agency theory, economics of transaction costs and property rights theory.
- Together, the three theories provide a method for causal analysis of critical motivations and decisions in an organization.
Understanding the organizational economy
Organizational economics are useful for developing a company’s human resource management policies, determining how a company should be organized, assessing business risks, implementing reward systems and making, analyzing and improving management decisions . For example, organizational economics could be used to assess why the 2020 BP oil spill in the Gulf of Mexico could have occurred and how a similar disaster could be avoided in the future.
How organizational economics can be used to examine causal factors
Applying organizational economics can reveal both the weaknesses of a current management approach and the means to effect change. Examining the subdomains that make up this method provides a way to understand the motivations and decisions that lead to operational decisions within an organization.
For example, drawing on the agency theory sub-domain, an assessment can be made of the guidelines that were in place before BP’s 2020 oil spill, what motivated these choices leading to the incident and why the agents involved felt compelled to operate under these conditions. In addition, there may be a review of the reasons why BP managers may or may not be aware of the issues and motivations at stake with agents on the oil rig.
In the transaction cost economics sub-area, an assessment could be made of any transaction costs that could have been made regarding the safe operation of the Deepwater Horizon oil rig and how these choices could have affected the disaster. . BP appears to have made cost-cutting decisions that have contributed to the erosion of platform stability. In addition, the security measures put in place on the oil platform by the company may not have been sufficient to give rise to the potential risks.
The application of the sub-domain of property rights theory, where individuals or organizations make choices based on available resources, raises questions about decisions made regarding the resources available on the oil platform. From a certain point of view, the company wanted to see a particular quantity of operational production within the limits of the time and assets that it had devoted to the exploitation of Deepwater Horizon. Achieving these goals, however, could have come at the expense of investment in maintenance and security measures that could have prevented the disaster.