Preferences and organization structure: Toward behavioral economics micro-foundations of organizational analysis

Abstract

The paper proposes micro-foundations for organizational analysis grounded in behavioral economics. As Simon (1985) pointed out it, “nothing is more fundamental in setting our research agenda and informing our research methods than our view of the nature of the human beings whose behavior we are studying.” The paper examines optimal workplace-level organization structure (decision-making delegation, incentives and monitoring) relative to four common types of individuals, just selfish, civil, decent and dedicated employees (characterized in terms of their social preferences, self- versus other-regarding, reciprocity, trusting and trustworthiness). Four principal propositions arise from this analysis. (1) Mismatch between organization structure and employee preferences reduces productivity and profits. (2) The less prosocial employees in an organization, the more complex and sophisticated and therefore expensive the organization structure must be. (3) The less complex and less interdependent are employees’ tasks, the less dependent is organization structure on employee social preferences. (4) Heterogeneity of preferences poses a design a dynamic challenge as practices generally have to be tailored to one type of employee, and will be associated with exit of other types or adverse-selection by types that will seek to exploit it.