Why organizations matter: A journey away from the fairy tale

This paper contends that a major breakthrough has occurred in economics, that this breakthrough is related to the matching of economics and organization theory, and that this breakthrough is already remodeling our understanding of how economic systems work. Section I comes back to the problem of the existence of organizations and to its generalization through the concept of "governance" structures. Section II develops the explanation provided by transaction cost economics of the trade-off among these structures. Section III compares recent contributions of agency theory and of transaction cost economics to the analysis of the structuring mechanism of formal organizations. Section IV explores some properties of the government of organizations. Section V argues that what precedes may have major consequences on public policies and regulations. Distinguished Address presented at the Forty-First International Atlantic Economic Conference, Paris, France, March 12–19, 1996.