On the Economic Efficiency of Organizations: Toward a Solution of the Efficient Government Enterprise Paradox

Abstract

The modern widely-held joint-stock corporation appears to epitomize the economically efficient large-scale organization. Some scholars observe, however, that other types of organizations, including government-owned enterprises, have also achieved high degrees of efficiency and that some joint stock corporations have been inefficient. It is here argued that the economic efficiency of organizations is largely a function of two major variables—market structure and incentives within the organization—and not organizational form or ownership structure per se. Case studies of two business firms: a mutual life insurer and a family-controlled publisher, and two industries: higher education and custom construction, demonstrate the importance of internal incentives and market structures to organizational economic efficiency.