Organizational Economics – Definition

Cite this article as:"Organizational Economics – Definition," in The Business Professor, updated January 14, 2020, last accessed October 25, 2020,

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Organizational Economics Definition

In applied economics, organizational economics studies the structure, performance, design, and transactions of an organization rather than the structure and transactions of the entire industry. Organizational economics focuses on an individual firm and studies its operations, transactions, management decisions, policies, organizational structure, and plans.

How effectively an individual firm coordinates its activities and manages its operations are studied under organizational economics. Students take organizational economics as a corse in the university, either at the doctorate or graduate level.

A Little More on What is Organizational Economics

Organizational economics has three subfields, these are;

  • Agency theory,
  • Transaction cost economics and
  • Property rights theory.

Aside from studying how a firm is able to coordinate its operations, organization economics also identifies the areas a firm is lacking. This branch of applied economics is most useful in the aspect of frim structure, developing company policies, making management decisions, assessing business risks, implementing incentives and rewards and the overall structure of the firm.

How Organizational Economics Can Be Used to Examine Causal Factors

Organizational economics is also useful in the assessment of a company crisis and how it can be averted in the future. When the organizational structure is applied, it helps highlight the strength and weaknesses of an organization and ways to make improvements. This branch of economics also helps to examine the causal factors of certain incidents in a firm, for instance, it was used to examine why BP oil spilled in 2010 and ways to prevent future occurrence.

The three subfields of organizational economics are important when assessing causal factors, the assessment is however done differently in these subfields. The three subfields of organizational economics are the property rights theory subfield, the transactions cost economics subfield and the agency theory subfield.

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