A healthy firm … constantly strives to place capability and rights to act on that capability in the same hands—a co-location problem. Jensen & Meckling specify that there are generally two ways we might solve this problem of co-location. We could let knowledge move to those who have the rights to act; or we could let the rights to act move to those with knowledge. The co-location of decision rights to (nonspecific) knowledge is possible only in markets. …in a market I can voluntarily exchange or sell the decision rights that accompany my knowledge. This is not possible in internal organization. In internal organization individuals are traditionally directed to a task on the basis of their implied capabilities, that is, the co-location proceeds in the opposite direction of markets—from (specific) knowledge to decision rights. Now, there are infinite ways to co-locate capabilities to decision rights. … This suggests that the difference among different organizational forms resides in the degree of decision-right autonomy. … Hence, one ‘efficiency’ criterion to evaluate different organizational forms on a comparative basis may reside in their relative ability to facilitate the co-location of capabilities and decision-making.
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