Distributed knowledge and delegated rights

How may the Hayekian knowledge-problem be handled in firms? One way is to suppress distributed knowledge as far as possible by discouraging local initiative, indoctrinating employees harshly, and operating with rigid routines and operating procedures. In a dynamic economy, this is, however, bound to lead to disaster. Something else must be done. As Mises (1949: 303) emphasized, "entrepreneurs are not omnipresent. They cannot themselves attend to the manifold tasks which are incumbent upon them," so that coping with distributed knowledge leads in the direction of decentralization (cf. also Hayek 1945: 83-4), through delegation of decision rights to managers (Mises 1949: 305). Mises also recognized that delegation leads to agency problems, but argued that the system of double-entry bookkeeping and other control measures may partly cope with such problems. Thus, in the Misesian scheme, an organizational equilibrium obtains where decision rights are delegated in such a way that the benefits of delegation in terms of better utilizing local knowledge are balanced against the costs of delegation in terms of agency losses (as in Jensen and Meckling 1992). This provides a useful perspective on many of those new organizational forms that are argued to be characteristic of the knowledge economy (cf. Cowen and Parker 1997), such as team-organization, "molecular forms", and other manifestations of organizational delegation and decentralization. These are prompted by a market-driven pressure to delegate decision rights (e.g. to better serve customer preferences) and structure reward schemes in such a way that optimal tradeoffs are reached.

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