The organizational roots of market design failure structural abstraction, the limits of hierarchy, and the California energy crisis of 2000/01

Georg Rilinger

No 21/6, MPIfG Discussion Paper from Max Planck Institute for the Study of Societies

Abstract: Economic sociologists have rarely studied organizational reasons why market design processes fail. Drawing on the organizational literature on mistakes and accidents, the paper identifies such reasons for a fatal design decision during the creation of California's first electricity markets. Designers proposed weak oversight structures even though their models called for active and permanent regulatory control. Sellers like Enron could therefore manipulate the market without fear of detection, prolonging the western energy crisis. A process of 'structural abstraction' explains this mistake. Designers were split into three groups that worked in different divisions and relied on local frames to understand the oversight requirements. Each group missed information the others were aware of and arrived at the conclusion that minimal oversight would suffice. Higher levels of the hierarchy should have discovered and resolved these discrepancies. However, these levels considered the issue at a higher level of abstraction. Such structural abstraction made room for ambiguities that obscured the local disagreements.

Keywords: California energy crisis; cognition and hierarchy; economic sociology; market design failure; organizational mistakes; Marktdesign; Fehler und Unfälle in Organisationen; Hierarchie und Kognition; kalifornische Energiekrise; Wirtschaftssoziologie (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-ene and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:mpifgd:216

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