Rational Choice and Organization Theory

Abstract

Rational choice theory is based on the premise of individual self-interested utility maximization. Organizational theory is based on the premise of efficient functioning of organizations through means/ends rationality within organizations. Organizational economic theory, which consists of transactions cost economics and agency theory, forms an indirect link between rational choice theory and organizational theory. However, transaction cost economics and agency theory differ in their grounding premises. Transaction cost theory holds to the premise of organizational theory that organizational rationality dictates that organizations are efficiently designed means/ends mechanisms, in some cases more efficient than markets, and finds the rational choice theory premise of individual self-interested utility maximization is problematic under conditions of uncertainty and asset specificity. Agency theory holds to the premise of rational choice theory that individuals are self-interested utility maximizers, but finds the organizational theory premise, that organizations function efficiently, is problematic. Thus, economic organizational frameworks, which purport to link micro-level rational choice theory to meso-organizational theory are unable to do so, due to the incompatibility of the premises on which rational choice and organization theory rest. As one set of premises are assumed, the other becomes problematic. No organizational theory has successfully integrated RCT and OT.