Decision Theory and Allocating Decision Making in the Firm

Abstract

I was invited to discuss decision theory and the firm for a conference on theories of choice. I believe that it is possible to deal productively with the subject matter of choosing and making decisions without actually settling upon any particular theory of choice. This is what transpires within the law of business organization. The law itself need not, and in fact does not, settle upon any particular theory of choice because the law does not consider itself the ultimate decision maker. Rather, it develops rules to allocate decision-making authority among various parties, and leaves the ultimate decision makers free to select from among the various theories of choice for themselves. Thus, the law sees its role as offering choices to business people. My contribution, then, is the claim that a settling upon a theory of choice is not always necessary. It is through this lens that I discuss decision theory and the allocation of decision making authority in the firm.

Keywords: corporate governance, corporate law, fiduciary duty, conflicts of interest, cost-benefit analysis, decision theory, institutional choice

JEL Classification: K20, K22