Chapter 7: Governance
We have seen that people can often benefit from the formation of groups that work together. Using the terminology of cooperative game theory, we call those groups coalitions in general. Coalitions can create value in a number of ways: by coordinating the division of labor and the production and use of higher order goods, including knowledge, which enhance the productivity of labor; by organizing the reallocation of goods, services, and resources in ways that are more productive or better adapted to the different preferences of consumers; and by sharing independent risks so that these risks can be managed more cheaply. If information were free, the activities of these coalitions would always be efficient, at least from the point of view of the members of the coalition. However, as we also have seen, information is not free, and this leads to a number of arrangements by which coalitions and individuals adapt to limited and costly information. Among the most important are money and organizations. An organization is a coalition that persists over time, with some persistent rules of procedure that may include a hierarchy of authority. In this book, the term "governance" refers to the hierarchies of authority and decision-making, formal rules of procedure, and informal social and moral norms that influence the day-to-day actions of a coalition, and particularly its responses to unanticipated problems and opportunities. This chapter is concerned with the governance of organizations.
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