Edited by Luigino Bruni and Stefano Zamagni
People create organizations for a wide variety of reasons. At one end of the spectrum, communities or whole societies form governments in order to provide essential public goods such as defense, public safety, justice, environmental protection or a social safety net that would not otherwise be provided efficiently by the free market. In these cases, government is a solution to the free rider problem because it has the power of coercion to require people in a jurisdiction to contribute to the public good through taxation (Olson, 1965). In this instance, formal organizations such as government service bureaus or regulatory bodies are mandated to carry out the statutory provisions established in law by government. Within these organizations, people work under employment contracts in exchange for compensation packages specified by administrative law, influenced by labor markets and sometimes determined through negotiated union agreements. At the other end of the formal organization spectrum is the private business corporation. Businesses are designed to carry out commercial activity more efficiently than a regime of individual contractual obligations by economizing on transactions costs. As initially developed by Coase (1937) in his theory of the firm, organizations will form and continue to grow in scope and size as long as the marginal cost of bringing an additional transaction inside the firm is less than the marginal cost of an equivalent market-based transaction with contractors outside the organization.
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