HEURISTICS, THE NON‐MAXIMIZING FIRM AND EFFICIENT ALLOCATION

Eirik G. Furubotn

Metroeconomica, 2009, vol. 60, issue 1, 1-23

Abstract: It has been suggested that the theory of the firm can be modified and improved by shifting to a (non‐maximizing) heuristic approach that is able to explain how relatively efficient outcomes can be brought about by the use of ‘fast and frugal’ decision rules. The paper argues, however, that certain heuristic mechanisms, which may have great appeal to entrepreneurs in practice, tend to lead firms to worse solutions than those that could be achieved in a neoinstitutional system with the use of other methods. Moreover, competition cannot be relied upon to eliminate such misallocation, and may even serve to promote the problem.

Date: 2009
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