chapter  3
31 Pages

Technical-Administrative and Agency Problems in Organizations

In this chapter we analyze the behavior of individuals in organizations. We attempt to separate two types of problems confronted by organizations in pursuing their goals: (l) technical-administrative problems that would occur even if all their members were dedicated to the fulfilment of the goals set by their controllers, and (2) agency-managerial problems that are rooted in the divergence among the preferences and goals of at least some members of the organization, including differences between its controllers and its agents 1•

We will frequently comment on the relative efficiency of different types of organization's behaving in a free-market environment. The implicit assumption here is that the playing field in which these various types competed was more or less level, so that the survival of a particular type of organization in an industry serving the market testified to its relative efficiency. This inference, for one thing, ignores the possibility that certain individuals may have preferences for particular work environments that will make them more disposed to work, say, in an employee-owned than in a proprietary firm (Williamson, 1975). The reader should also keep in mind that even in the United States, where the degree of governmental discrimination in favor of or against one type of organization or another was probably less than in most developed market economies, the assumption of a

level playing field was not precisely satisfied. In many states, for instance, special tax breaks were available to agricultural cooperatives (resource-pooling firms in our vocabulary) that gave them an edge over their proprietary competitors. Another, more subtle discrimination pointed out by Hansmann (1988) is that most states exempted power companies with a natural monopoly from regulatory control if they were organized as cooperatives. Other cooperatives received loans at concessionary rates of interest from the federal government, as did of course government-owned firms such as the Tennessee Valley Authority. Laws prohibiting competition in certain areas (such as the carrying of private mail in the case of the US post office) also protected government-owned firms. On the other hand, as Jones (1982) points out, discrimination can work the other way, as where employee-owned firms are prohibited from using their jointly owned assets as collateral for bank loans. Lack of familiarity with a type of organization or ideological prejudice against its adoption may also reduce its incidence (as may be the case for employee-owned firms).