Bounded Rationality, Indeterminacy, and the Theory of the Firm

Two issues have become increasingly apparent in attempts to apply the prevailing notions of economic rationality to the theory of the organization of business firms: bounded rationality and indeterminacy. An attempt is made to provide a more detailed taxonomy of bounded rationality than is usually d...

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Bibliographic Details
Published in:The Economic journal (London) 1996-09, Vol.106 (438), p.1360-1373
Main Author: Radner, Roy
Format: Article
Language:English
Subjects:
Bounded rationality
Business structures
Controversy
Economic costs
Economic models
Economic theory
Economic uncertainty
Firm theory
Game theory
Information processing
Mechanism design
Observational research
Organizational behavior
Rationality
Taxonomy
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Summary:Two issues have become increasingly apparent in attempts to apply the prevailing notions of economic rationality to the theory of the organization of business firms: bounded rationality and indeterminacy. An attempt is made to provide a more detailed taxonomy of bounded rationality than is usually done. In particular, it is important to distinguish between costly rationality and true bounded rationality. Indeterminacy arises in attempts to apply the theory of strategic games to models of organizations; namely, one often faces a very large multiplicity of solutions, which significantly weakens or even destroys the predictive power of the theory. Both of these issues have profound implications for the organization of the firms. It is argued that costly rationality alone leads to the decentralization of information processing, decision making, and incentives in firms. It is argued that truly bound rationality and indeterminacy of equilibrium make the current game-theoretic approach to the theory of the firm both implausible and inadequate.
ISSN:0013-0133
1468-0297
DOI:10.2307/2235528