Towards a Complexity-Based View of the Firm

This study examines the role of computational complexity in the organization of economic activity. An important goal of economic organization is to achieve coordination, which occurs when interdependent activities are configured such that they are jointly valuable. Given the complexity that is associated with coordination, the goal of achieving coordination can be recast as the goal of increasing manageable complexity, which is the level of complexity at which the difference between the contributions of activities and the cost of managing the complexity associated with the activities is at its highest. We consider two broad ways by which manageable complexity can be increased: designing appropriate coupling structures and use of resources. Results from a simulation model show that near decomposability in coupling structures improves coordination when interdependencies are pervasive. Since near decomposability can be equated with the presence of both hierarchies and markets, this finding strengthens the support for the claim that both hierarchies and markets are required for achieving coordination even when problems related to opportunism, cheating, and shirking are absent. The use of hierarchies and markets is augmented by the use of resources such as physical assets, managerial capabilities, and knowledge, all of which play an important role in increasing manageable complexity