Wednesday, March 2, 2011

Class 12 Take Aways

The Better Angels of Our Nature?

Why do organizations grow bureaucratic and rule-bound as they scale up? In this class, we saw how game theory can explain this phenomenon. This class was all about impediments to achieving cooperation in the face of social dilemmas. Here, we highlighted the social aspect of solving social dilemmas. In a small enough society, punishment by ostracism can deter bad behavior. The idea is that, while interactions with any particular individual in a society might be rare, if individuals talk, then a society level punishment might be sustained in the face of bad behavior.

But when societies grow large, this glue dissolves. Put differently, social solutions to social dilemmas are not scalable. The trouble occurs when the interactions become too infrequent and information too diffuse for a social deterrent to be effective. This can take the form of a tipping point where I society functions well and then, suddenly, good behavior falls apart in a significant way.

In a corporate setting, this implies limits to the size of effective organizations and an additional cost to outsourcing. Much of good behavior in organizations is enforced through social contracts. In Japan in particular, these contracts are often quite explicitly understood. Elsewhere they are more subtle. As long as the organization is sufficiently cohesive--interactions occur frequently enough and news spreads widely enough, then informal social contracts can work well. But, as the organization becomes more spread out and information spreads more slowly, a well functioning organization can suddenly lose its effectiveness. Even if other aspects of the business scale well, the social aspect need not.

The solution, of course, is to replace implicit social contracts with explicit contracts with monitoring. Of course, this might be very costly. Still, the prediction of game theory is that organizations will become more bureaucratic with scale simply as a means of solving social dilemmas within the organization.

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