15、Specific and General Knowledge and Organization

SPECIFICANDGENERALKNOWLEDGE,ANDOR[e-mail]esterABSTRACTWeanalyzehowthecostoftransferringspecificknowledgeencouragesthedecentralizationofdecisionrightsandhowthisdecentralizationgeneratestherightsassignmentandcontrolproblems.Ignoringagencyproblems,assigningdecisionsrightstoindividualswhohavethedecision-relevantknowledgeandabilitiesincreasesefficiency.Self-interestonthepartofindividualdecisionmakers,however,requiresacontrolsystemtomotivateindividualstousetheirdecisionrightsoptimally.Acapitalisteconomysolvestherightsassignmentandcontrolproblemsbygrantingalienabledecisionrightstoindividuals.Unlikemarkets,thedecisionrightsassignedtoindividualsinorganizationsseldomincludetherighttoalienatethoserights.Thisinalienabilityofrightsrequiresorganizationstosolvetherightsassignmentandcontrolproblemsbyalternativemeans.Theysolvetheseproblemsbyestablishinginternalrulesofthegamethat:1)provideasystemforpartitioningdecisionrightsamongagentsintheorganization,and2)createacontrolsystemthatprovidesaperformancemeasurementandevaluationsystemandarewardandpunishmentsystem.Theinherentinefficiencyoforganizationalcontrolsystemsascomparedtoalienabilitymeansfirmscannotsurviveunlesstheyprovideotheroffsettingadvantagessuchaseconomiesofscale,scopeorriskbearing.©MichaelC.JensenandWilliamH.Meckling,1990ContractEconomics,LarsWerinandHansWijkander,eds.(Blackwell,Oxford1992),pp.251-274.alsopublishedinJournalofAppliedCorporateFinance,Fall1995,andFoundationsofOrganizationalStrategy,MichaelC.Jensen,HarvardUniversityPress,1998.Youmayredistributethisdocumentfreely,butpleasedonotposttheelectronicfileontheweb.Iwelcomeweblinkstothisdocumentat:=6658.Irevisemypapersregularly,andprovidingalinktotheoriginalensuresthatreaderswillreceivethemostrecentversion.Thankyou,MichaelC.JensenSPECIFICANDGENERALKNOWLEDGE,ANDORGANIZATIONALSTRUCTUREMichaelC.Jensen*[e-mail]versityofRochesterContractEconomics,LarsWerinandHansWijkander,eds.(Blackwell,Oxford1992),pp.251-274.alsopublishedinJournalofAppliedCorporateFinance,Fall1995,andFoundationsofOrganizationalStrategy,MichaelC.Jensen,HarvardUniversityPress,1998.1.IntroductionInthischapterweanalyzetheinstitutionaldevicesthroughwhichdecision-makingrightsareassignedinmarketsandwithinfirmsandthedevicesusedtomotivateagentstomakeproperdecisions.Wefocusonhowthecostsoftransferringinformationbetweenagentsinfluencestheorganizationofmarketsandfirms.1.1SpecificandgeneralknowledgeWedefinespecificknowledgeasknowledgethatiscostlytotransferamongagentsandgeneralknowledgeasknowledgethatisinexpensivetotransmit.Becauseitiscostlytotransfer,gettingspecificknowledgeusedindecision-makingrequiresdecentralizingmanydecisionrightsinboththeeconomyandinfirms.Suchdelegation,inturn,creates*ThisresearchhasbeensupportedbytheManagerialEconomicsResearchCenter,UniversityofRochester,andtheDivisionofResearch,HarvardBusinessSchool.WearegratefulforthecommentsandcriticismsofGeorgeBaker,RobertEccles,LarsWerin,andKarenWruck.JensenandMeckling19922twoproblems:therightsassignmentproblem(determiningwhoshouldexerciseadecisionright),andthecontroloragencyproblem(howtoensurethatself-interesteddecisionagentsexercisetheirrightsinawaythatcontributestotheorganizationalobjective).Capitalisteconomicsystemssolvetherightsassignmentandcontrolproblemsbygrantingalienabilityofdecisionrightstodecisionagents.Arightisalienableifitsownerhastherighttosellarightandcapturetheproceedsofferedintheexchange.Indeed,wedefineownershiptomeanpossessionofadecisionrightalongwiththerighttoalienatethatright,andwebelievethatwhenpeopleusethewordownershipthatiswhatismeant.Thiscombinationofadecisionrightwiththerighttoalienatethatrightisalsowhatisgenerallymeantbythetermpropertyrightsofrequentlyusedineconomics(see,forexample,AlchianandAllen1983,p.91;Coase1960).Incontrasttomarkets,organizationsgenerallydonotdelegatebothdecisionrightsandthealienabilityofthoserightstotheagent.Amachineoperatormightbedelegatedtherightstooperateandmaintainamachine,butnottherightstosellitandpockettheproceeds.Intheabsenceofalienability,organizationsmustsolveboththerightsassignmentandcontrolproblemsbyalternativesystemsandprocedures.Wediscussthecriticalrolethatalienabilityplaysinthemarketsystemandsomeofthesubstitutecontrolmechanismsusedinfirms.1.2ColocationofknowledgeanddecisionauthorityF.A.Hayekwasanearlyproponentoftheimportanceofknowledgeanditsdistributiontoawell-functioningeconomy.Inhisseminalarticleon“Theuseofknowledgeinsociety,”Hayek(1945,pp.519ff.)arguesthatmosteconomists,aswellasadvocatesofcentralizedplanning,misunderstandthenatureoftheeconomicproblem.“Theeconomicproblemofsocietyis...notmerelyaproblemofhowtoallocate‘given’resources—if‘given’istakentomeangiventoasinglemind...Itisratheraproblemofhowtosecurethebestuseofresourcesknowntoanyofthemembersofsociety,...aJensenandMeckling19923problemoftheutilizationofknowledgewhichisnotgiventoanyoneinitstotality.”Hayek’sinsight