Review

Author(s): Norman J. Ireland

Review by: Norman J. Ireland
Source: The Economic Journal, Vol. 95, No. 380 (Dec., 1985), pp. 1109-1111
Published by: Wiley on behalf of the Royal Economic Society
Stable URL: http://www.jstor.org/stable/2233278
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 I985] AOKI: THE COOPERATIVE GAME THEORY OF THE FIRM II9

employer, this is not always so. Authority may be delegated, and the relation-

ship then becomes one of principal and agent. Thus we find a review of the

basic literature on the design of reward systems in such cases. This review is

followed by another on the hierarchical structure of the modern business and

the loss of control that arises through the distortion of messages as they pass up

and down the chain of command. In some way these chapters explain the role

of administration, management, judgement and supervision.

The final part of the book is a series of chapters on the organisation of

decision-making. These largely take the form of a review of the social-choice

and incentive-mechanism literatures. Although it is a survey of sorts the reader

ends up in a strange limbo when the text ends on page 273. This is the whole

problem with the book. It is a whole series of interesting threads which are

never really woven together by the author and seem to lead one nowhere. The

book is extremely formal in its argument and I think the reader who perseveres

really deserves a little better treatment. Some decently extensive concluding

chapter bringing all the lines of argument together is needed if one isn't to feel a

bit lost in what is clearly a fascinating land.

The book is part of North-Holland's Advanced Textbook series whose

editorial introduction claims that treatments should be easily mastered. How-

ever, make no mistake about it, this book is abstract and extremely difficult

going, but its main problem is well illustrated by a comment James Hess makes

on page III: 'some messages provide much greater information when com-

bined with other messages than the simple sum of separate contributions'. For

this reader the Economics of Organisation falls into the latter category.

JOHN BEATH

lUniversity of Bristol

The Co-operative Game Theory of the Firm. By MASAHIKO AOKI. (Oxford: Clarendon

Press, I984. Pp. Vi+2I9. ?17.50 hardback.)

This book discusses, in a clear and elegant style, the view that firms do not take

decisions for the sole benefit of one of the groups within the firm (shareholders,

managers, workers), but rather for the benefit of all such groups. The book is

arranged in three parts. The first presents an interesting and stimulating review

of the 'orthodox' theories of the firm, including those of the neoclassical,

managerial and worker-controlled fiims. The second consists of a detailed

analysis of a firm where workers and shareholders co-operate in the decision-

making of the firm. The third part considers three stylisations of 'legal mode

of corporate structure and industrial relations' (p. 8) to assess their abilities to

attain the efficiency properties set out in the model of part 2.

In the co-operative game theory of the firm, the manager might be viewed as

a referee in a situation of potential conflict between workers and shareholders

for the expropriation of the organisational rent of the firm. The latter is

basically the difference between firm revenue and costs, where labour and

capital are priced at appropriate levels reflecting basic alternative opportunities.

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 IIIO THE ECONOMIC JOURNAL [DECEMBER

A key factor in this potential conflict, however, is that the providers of either

labour or capital can threaten to withdraw their goodwill and substantially

reduce or eliminate the size of the organisational rent. Thus a co-operative

solution to the division of the organisational rent relating to the 'boldness'

(a combination of attitude to risk and ability to threaten) of the participating

groups is proposed. Professor Aoki refers to the outcome of this co-operative

game as the Organisational Equilibrium; the features of interest within this

equilibrium are not only the division of surplus itself but the effects such a

division has on the operating characteristics of the firm. It is in this latter

respect that The Co-operative Game Theory of the Firm has the most interesting

implications.

The major implication discussed in the book is that, whereas each shareholder

will wish the firm to grow at a rate that maximises the total organisational rent,

each worker, given the assumptions of a constant output-to-worker ratio, will

wish to maximise organisational rent per worker, and will not wish additional

workers to be employed beyond the point where their marginal revenue product

is equal to the current income share per worker. This distinction will be well

known to readers familiar with the Illyrian model of the labour-managed firm.

Thus the organisational equilibrium proposed by Professor Aoki responds less

to growth stimuli than that of an orthodox profit-maximising firm. Questions

relating to lay-offs and how growth affects workers' promotion opportunities

are also investigated. However, the opportunities (or lack of opportunities) for

intertemporal co-operation are not really analysed: for instance, how do current

decisions (of, say, investment or recruitment) affect future 'boldness', and are

these effects taken into account in current decisions? There may also be future

benefits for a reputation earned by current boldness. Decision-making areas

such as managerial policy concerning, say, hours of work and disciplinary code

are also neglected. Nevertheless, sufficient features are considered in detail to

provide a convincing case for the organisational equilibrium to be significantly

different from that of an orthodox profit-maximising firm. Nor would it be

correct to describe the co-operative game firm as just a weighted average of

profit-maximising and worker-managed firms, since the weights would reflect

many aspects of the economic environment of the firm and would only be

parametric as an approximation.

After presenting the theoretical model, Professor Aoki considers three

stylisations of models of the firm. A shareholders' sovereignty model has too

inflexible a wage system and thus is unlikely to attain an efficient outcome in

organisational equilibrium terms: the union only has power in determining

wage rates and thus 'the higher wages, higher lay-offs (and less investment) and

adversarial industrial relations that seem to have stagnated some ofthe American

unionized industries in the I970s may be attributable partly to the inefficient,

nonco-operative framework of their collective bargaining institution' (p. I50).

A participative management model exhibits problems concerning the flow of

information, particularly the sharing of private information, while a managerial

corporation model yields an abuse of managerial power, unless both share-

holders and workers can exert some control.

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 I985] CUKIERMAN: INFLATION IIII

Professor Aoki's two main conclusions are persuasive. First, most current

firms are such that a single group (shareholders, workers or managers) do not

exert all the power in decision-making, since any other group may effectively

sabotage the firm by withdrawing co-operation, and this distribution of power

should be recognised and incorporated in normative models of the firm.

Secondly, current practice in firm organisation falls far short of what could be

attained and there is scope for reform. This book and these conclusions should

stimulate a considerable body of further research.

NORMAN J. IRE LAND

University of Warwick

Inflation, Stagflation, Relative Prices and Imperfect Information. By ALEC CUKIERMAN.

(Cambridge: Cambridge University Press, I984. Pp. Xiii+202. ?I9.50.)

This book is both a technical survey and an advanced textbook on the imperfect

information approach to inflation and its real effects. The book is in two basic

parts: the first discusses confusion between aggregate and relative prices, and

the second discusses confusion between permanent and transitory price changes.

Chapters 2 and 8 are readable introductory surveys of the uses of prices to

convey information. The other chapters constitute a detailed discussion of the

two main topics. The level is either third-year undergraduate for ambitious

schools, or postgraduate. Although the required level of mathematics and

statistics is not high, the main body of the book requires careful reading. In

each part an algebraic model is developed, and used with appropriate modifi-

cations, to discuss various topics. Even with appendices, the text must be read

systematically.

Part i develops a unified rational expectations equilibrium framework along

lines pioneered by Robert Lucas in his I973 A.E.R. paper. Chapter 3 develops

a Phillips Curve where unanticipated increases in the general price level are

misinterpreted as increases in their own price levels by individual agents.

Chapter 4 discusses the relationship between monetary variability and cross-

sectional variability in aggregate price expectations, and chapter 6 goes on to

discuss the impact of this variability between individuals of the general rate of

inflation on the bond market. The treatment of redistribution and allocative

efficiency is particularly good. The final chapter of Part i discusses the relation-

ship between relative price variability and the variability of inflation and the

cross-sectional variance of inflationary expectations.

Part ii is about the confusion between permanent and transitory price move-

ments. Again the context is a model where expectations are rational and all

markets clear. Persistence in real variables arises because agents cannot distin-

guish between permanent and transitory shocks. A permanent negative shock

to productivity is, in chapter 9, used to explain stagflation. Chapter io discusses

monetary policy in this model and, unlike the model itself, it has no surprises.

The final chapter, i i, again discusses the relation between the rate of inflation,

its variance and the variance of relative prices.

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