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Behavioural theory of the firm


A theory which attempts to improve upon the standard economic theory of the firm by taking account of the fact that many present-day firms are large, complex organizations with hierarchical managerial bureacracies. The theory rejects the classical assumntion that firms wish to maximize profit, and indeed rejects the idea that firms wish to maxirnize anything. Rather, it sees the firm as being composed of a number of sub-groups managers, workers, shareholders, customers, suppliers - each of which has a set of goals which may well be in conflict with each other (higher wages mean higher prices, lower profits, etc.). As a result the actual goals adopted by the organization will represent a comprornise which more or less resolves the conflict, and so cannot maxirnize any one thing. The theory also considers the processes by which these goals are revised over time, and, again unlike the traditional theory of the firm, makes uncertainty and the search for information important determinants of the firm's behaviour. Thus the theory stresses the effects which the processes of decision-taking and the organization of the firm have on the decisions it makes. The development of the theory owes a great deal to the insights provided by organization theorists, industrial psychologists and sociologists, and it is associated primarily with the work of H. A. Simon, J. G. March and R. Cyert, and·the Carnegie Institute of Technology. Although it is accepted as being descriptively realistic, the theory has not replaced the traditional theory of the firm.


Reference: Oxford Press Dictonary of Economics, 3rd edt.